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Receivable finance in Canada. Boy do we get a lot of questions around this single method of financing receivables in Canada. Another term for the same subject is of course 'cash flow factoring’.
So let’s take some of those often asked questions, 8 in total and... You guessed it, answer them!
Question # 1- Does a Canadian start-up or early-stage company utilize receivable finance? The answer is a resounding yes. The reality is of course that same business is often ineligible to obtain most other methods of Canadian business financing by the very nature of the start up. Since cash flow factoring focuses on the asset of receivables it makes sense it’s a good solution for a start up firm
Question # 2 - Can you set this type of facility up on your own without the assistance of anyone? Again, it’s a resounding yes. However, due to the fragmented and generally misunderstood issues around the subject it would make often more sense to use a Canadian business financing advisor who is aware of the issues, pitfalls, and pricing around A/R finance. Another point is that this method of financing is clearly not all about the price after you get into how it works daily mechanics, etc.
Questions # 3 - another great one. Does all of your A/R investment need to be financed at all times? The answer is no... This is clearly one method of financing your business that is essentially ‘pay for only what you use '. Although some facilities might require a minimum usage essentially it’s your call as to what A/R and when to finance.
Question # 4 - Are there contacts involved with respect to committing to such a facility. The answer is that certain facilities require no contract how most cash flow factoring firms do often require a commitment from your firm. That can often be negotiated and allow you to have some flexibility built into it. The reality here though is that you typically will use this type of finance for a year anyway as you move towards a more traditional bank borrowing.
Question # 5 - Does a firm have to have good financials to qualify. In general the answer is no. Unless your firm is in a death spiral past financial challenges your firm faces do not preclude you from obtaining receivable finance. As a rule if your sales are stable or growing you're an excellent candidate for cash flow factoring.
Question # 6 - Who exactly provides cash flow finance in Canada. For a starter it’s not the banks when it comes to invoice financing. There are firms that are very small in nature, some are subsidiaries of U.S. firms, and some are substantial on their own, and Canadian owned. Pricing, qualification, deal size, etc all vary so here again it makes sense to work with someone who is knowledgeable about industry players, their offering, and reputation. Again, beware of the ' low price ' carrot - it’s often, if not always, what it seems.
WHAT DOES RECEIVABLE FINANCING COST ?
Question # 7- Pricing. Ah, we thought you would never ask. As a general rule factoring in Canada is in the 1.5-2% range, sometimes more, sometimes less. The industry views this monthly rate as a discount, i.e. it buys your A/R at a 2% discount to its value. You can offset this cost by purchasing smarter, taking discounts from suppliers, and selling and collecting more, thereby increasing your profits. And don’t forget, you're simply not carrying receivables for 60 or 90 days anymore, but it makes total sense still to stay on top of your collections to reduce costs to finance.
Last question, Question # 8 - what is the actual difference between A/R finance and a bank facility. As a joke we could say ' the ability to get one ‘! But the reality is that we've partially answered that one already. Receivables finance is the purchase of your sales and receivables as you make that sale and invoice. Banking is simply offering financing that takes your receivables as a backup collateral. That's a simplistic answer, but it’s a basic one.
Speak to a trusted, credible and experienced Canadian business financing advisor who can assist you in your receivable finance and cash flow factoring needs.
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Stan Prokop 7 Park Avenue Financial/Copyright/2020
