Receivable Factoring: Immediate Cash Flow Solutions

Receivable factoring transforms your outstanding invoices into immediate working capital to enhance your business's operational efficiency and growth potential.

7 Park Avenue Financial originates business financing solutions for Canadian Businesses – We offer RECEIVABLE FACTORING solutions that solve the issue of cash flow and working capital – Save time and focus on profits and business opportunities

INTRODUCTION

Canadian business owners and financial managers can make some big, painful, expensive and time-consuming mistakes when choosing the wrong receivable factoring facility with a third party.

Receivable factoring offers a streamlined financial solution for businesses encountering cash flow issues. Businesses can convert outstanding invoices that are not older than 90 days into immediate cash. Small to medium enterprises (SMEs) can bridge the gap between delivering goods and services and client payment. This enables businesses to maintain operational stability and invest in growth opportunities without the risk of negative working capital.

3 MISCONCEPTIONS ABOUT FACTORING

In a previous article, we highlight three popular misconceptions about factoring receivables – they were:

1. Receivables Factoring is the pledging of accounts receivable- it is the selling of accounts receivable - Factoring and receivables discounting are essentially the same thing and are the opposite of assigning your receivables to a bank under a General Security Agreement

2. Factoring is expensive - factoring fees/ AR factoring rates are not expressed as ' interest rates ' in your receivable factoring agreement

3. All accounts receivable financing services and facilities are essentially the same - Factoring receivables funding can be different!

We all agree that your investment in receivables will drain cash inflows in your business no matter what the invoice amount is until the invoice is paid. Getting clients to pay in 30 days these days is almost impossible!

THE WHAT DOES FACTORING COST ISSUE! HOW TO CALCULATE ACCOUNTS RECEIVABLE FUNDING SOLUTIONS

We provided information that clearly showed several fallacies and myths about the factoring of trade receivables and info around that very popular question ' how much does a factoring company charge?' are in Canada. The prudent business owner needs to investigate the true costs and ‘how to’ of factoring receivables in Canada when dealing with accounts receivable factoring companies.

2 MAJOR MISCONCEPTIONS ABOUT FACTORING - ADDRESSING ACCOUNTS RECEIVABLE FACTORING PROS AND CONS

Let’s now share two other major misconceptions about this method of business financing in Canada. They are as follows:

    Factoring is very intrusive to my customers and suppliers (NOT NECESSARILY!)

    All factoring companies are essentially the same (WRONG!)

IS FACTORING RECEIVABLES A GOOD IDEA? WHY DO COMPANIES USE FACTORING?

Before examining these two popular business misconceptions, let's take a very brief step back and recap what receivable factoring is, how factoring companies work and what they charge for their fees.

Canadian businesses need cash flow and working capital more than ever to survive. Many traditional sources have either disappeared, dried up, or are not available in the current business climate. Of course, we are primarily referring to generous bank lines of credit for accounts receivables and inventory. Businesses must continue, so how do business owners resolve these temporary cash crunches? Factoring government receivables is also possible.

One alternative is factoring. The other is a term loan, which has fixed payments and generally extends for three to five years. So, the business owner must decide whether to focus on short-term working capital—i.e., a factoring solution—or permanent working capital via a term loan or more owner equity.

Companies can choose between non-recourse and recourse factoring, depending on whether they carry their traditional bad debt risk or transfer it to the factoring company. Accounts receivable factoring without recourse is more expensive but removes the risk of bad debt losses. International receivables factoring often calls for non-recourse financing or getting business credit insurance.

So now, let’s debunk two myths surrounding factoring.

THE OLD SCHOOL U.S. MODEL IN FACTORING FINANCE

In a traditional, what we will call the U.S. model of factoring, we will agree that factoring, otherwise known as receivable discounting, is, in fact, intrusive. The factoring firm can, in essence, take control of your entire receivables function, including invoicing your customers with notification from themselves, dunning letters and calls for collection, and insisting that payments be made directly to their firm.

WORK WITH 7 PARK AVENUE FINANCIAL'S EXPERT FINANCING TEAM

Is this intrusive – we certainly think so. Is this the only alternative for Canadian businesses – absolutely not? Prudent business owners will seek an experienced, trusted, and credible advisor in business financing who will structure a facility that allows them to collect their own receivables.

Under this scenario, called Confidential Receivable Financing, they will reap the benefits of factoring (Immediate cash, increased working capital) while at the same time preserving customer goodwill. We think it's the best receivable factoring program. Factoring receivables funding can be different when it comes to non-notification a/r facilities.

So the bottom line is, yes, if you enter into the wrong type of facility, factoring will be deemed intrusive, but you have options. You should investigate those with professional assistance.

ARE ALL FACTORING COMPANIES THE SAME?

Now let’s cover our final misconception – ‘all factoring firms are the same. The reality is that if you are not an expert in this unique form of business financing, then you can probably be forgiven for having talked to a few firms and drawn the conclusion they have the same product and service offering.

The reality – Nothing could be further from the truth. Factor firms in Canada are sorted by geography, ownership (many are just branches of U.S. and U.K. operations), their own capital and borrowing structure, and, most importantly, how they do business on a day-to-day with you and your customers. Receivables factoring is not debt, and your balance sheet remains intact.

When we talk to clients both small businesses and large about business accounts receivable factoring solutions and financing accounts receivable, we recommend they focus on firms with a nominal holdback, a competitive advance rate, and, most importantly, are comfortable allowing you to do your own billing and collecting.

Naturally, at the same time, when you factor in your receivables, you are in a position to reap the key benefits of receivable financing, which is cash flow and working capital leverage you did not have.

KEY TAKEAWAYS

CONCLUSION - INVOICE FACTORING

Every small business in Canada knows the importance of slow-paying customers and getting their clients to pay the invoice for products or services that your business sells or are delivered.

The adage is, of course,' the sale isn't complete until the invoice is paid '! Receivable factoring credit lines are a solid alternative to traditional bank lines of credit. When it comes to the always asked question ' how much does factoring receivables cost, 'it's often a question of access to capital versus the cost of capital.

When it comes to ' what is the difference between factoring and securitization of receivables, 'we can say that the concept of moving a/r off-balance sheet is typically used by larger corporations where transactions are in the many millions of dollars in tranches when it comes to factoring credit lines.

Call 7 Park Avenue Financial, the a/r financing and receivables factoring expert, sort out the good from the not-so-good, and focus on a receivable financing facility that meets your cash flow and growth needs at a competitive factoring fee. That’s solid business financing.

FAQ: FREQUENTLY ASKED QUESTIONS / PEOPLE ALSO ASK / MORE INFORMATION

What is accounts receivable factoring?

Factoring is a key method to finance the balance sheet and is a part of asset-based lending solutions as the new alternative in Canada to finance a business via selling unpaid invoices before the customer pays. In a factoring facility, a business sells its receivables to a third-party finance firm - ' the factor.' The business receives funds for the invoice amount, less a ' factoring fee. '

Do banks do factoring? Receivable Financing vs factoring

Canadian chartered banks do not normally offer true ' factoring' of receivables. Still, they offer accounts receivable finance by taking the assignment of receivables as collateral for a loan/line of credit. That's the essential difference between ' pledging and factoring' your A/R which is a 'discount fee ' process. Banks ask you to assign receivables, factoring firms ' buy ' your receivables in a factoring transaction. That is how you calculate ar factoring, which is a fee transaction, not an interest rate per se.

What are the advantages of factoring? Why factoring receivables is beneficial to a seller

The main advantage of factoring is the ability of a company to receive immediate cash for sales revenues from their client's company's accounts, without having to wait for customers to pay, under the factoring agreement.

In traditional factoring solutions, the company can utilize the credit granting and collection expertise of Canadian factoring companies. Companies with good gross margins should easily absorb the cost of a factoring arrangement, i.e. the factoring fee.

Factoring provides immediate funds based on your invoices, without the need to incur debt or undergo extensive credit checks that traditional loans require.

Costs can vary but generally include a percentage of the invoice amount as a fee, ranging from 1% to 2%, depending on the industry, volume, and credit risk.

Yes, by ensuring you have the cash to pay bills on time, factoring can help improve your credit score, making future financial dealings more favourable.

Non-recourse factoring allows businesses to sell their invoices without the obligation to buy them back if the client fails to pay. The factoring company takes responsibility for bad debt and collection risk. Many factoring companies also can offer credit insurance for companies with commercial or government clients domestically and internationally.

Typically, funds are provided within 24 to 48 hours after the invoices are verified and approved by the factoring company.

Most factoring services require a minimum dollar size value of the invoice of $500.00 but this can vary significantly between different factoring companies when it comes to receivable factoring cost and processes. There is no upper limit to what the factoring company accepts as a financeable invoice.

While most B2B industries qualify for factoring from a financing company, those with high creditworthiness among debtors are particularly well-suited. Payment terms must be under 90 days.

Properly managed, factoring should be transparent to your clients; however, it's vital to choose a reputable factor that interacts professionally with your clients.The primary risks include dependency on the factoring line for operating cash and potential customer dissatisfaction if the factor handles collections poorly.

Some factors may require personal guarantees, especially in non-recourse agreements, to mitigate the risk of non-payment by the debtor. In general little emphasis is placed on personal guarantees, unlike banking .

Evaluate factors based on their fee structure around accounts receivable factoring cost , the advance rate cash advance, customer service reputation, and the flexibility of their terms to find the best fit for your business’s needs.

In recourse factoring, you must buy back the unpaid invoices; in non-recourse, the accounts receivable factoring company absorbs the loss as the factoring company assumes default risk, depending on your agreement terms.

' Canadian Business Financing With The Intelligent Use Of Experience '

Stan Prokop is the founder of 7 Park Avenue Financial and a recognized expert on Canadian Business Financing. Since 2004 Stan has helped hundreds of small, medium and large organizations achieve the financing they need to survive and grow. He has decades of credit and lending experience working for firms such as Hewlett Packard / Cable & Wireless / Ashland Oil

Receivable Factoring: Key to Liquidity and Business Growth | 7 Park Avenue Financial

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