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In the dynamic landscape of business finance, a Receivable Financing Company emerges as a beacon of stability and growth for enterprises seeking to optimize cash flow and fuel expansion.
Struggling to secure funds for your business? Discover how Receivable Financing solutions can be the key to unlocking capital for your growth ambitions.
7 Park Avenue Financial originates business financing solutions for Canadian Businesses – We offer RECEIVABLE FINANCING & solutions that solve the issue of cash flow and working capital – Save time and focus on profits and business opportunities
Understanding Receivable Financing Company in Canada
Introduction: The Balancing Act
It's not that hard of a business question... ‘Would you pay more for something if you thought the benefits far exceeded the cost?' That's the 'balancing act' we refer to when we talk to clients about receivable financing and the factor rates that are associated with that type of financing.
RECEIVABLE FINANCE COMPANY solutions empower businesses and allow them to fix financial challenges quickly. These solutions leverage the untapped cash asset - accounts receivables and help your business to achieve financial stability.
Basics of Accounts Receivable Financing
Most business owners today are familiar with accounts receivable and accounts receivable financing, Canada’s newest forms of working capital and cash flow financing, especially when they have investigated the costs associated with factoring.
Accounts receivable loan is another term for this financing mechanism, which allows businesses to receive immediate funds for outstanding invoices.
So they already understand the basics, simply that it’s a financing mechanism that allows you to efficiently sell your receivables, aka ‘your sales’ as you generate that revenue. You sell them at a discount (the ‘discount’ is what we are talking about today) to obtain operating cash flow.
Transaction Key Points
So it's clear that the actual amount and size of your receivables is key to the transaction, not necessarily your overall financial health. And again, as we explain to clients, financing from factoring companies is not a loan; it’s a simple monetization of your current asset, the receivable.
Managing Financing Cost
Typically you can reduce and stay on top of financing cost when you are able to prepare regular monthly financials, understand your cash flow ins and outs, and have a sense of what financial projections are relative to cash flow planning.
Understanding Factoring Company Cost
So, let’s get into the essence of our subject, factoring cost, with a key aspect being accounts receivable factoring. We’ll start by simply outlining the basics, which is knowing what your total A/R is, how much you wish to finance, and how this financing cost is tabulated. Invoice factoring plays a crucial role in determining the overall factoring cost by providing immediate funding against outstanding customer invoices, thereby influencing the cost calculation with its unique fee structure and advance rates.
How does Accounts Receivable Factoring Work?
The Discount Fee
The receivable financing industry in Canada calls the cost of this business a 'discount fee'. Customers tend to think of this as 'the rate'.
How the Cost Works
So how does this ‘cost’, or ‘rate’ if you will, work? You are advanced to a certain percentage of your invoices as you generate them. Typically in Canada, this amount is 90%. Any invoices under 90 days old can be financed, and you should know that you can finance them whenever you want. It's also crucial to understand that accounts receivable financing rates can vary significantly, influenced by factors such as the advance rate required, the level of risk, and the size of the financing facility, making it an important consideration for businesses looking into this financing option.
Invoice Factoring Rates in Canada
In Canada, financing accounts receivable through methods like factoring involves rates that typically run between 1-2 %.
This financing method allows businesses to receive immediate funds by selling their outstanding invoices at a discount, thus providing a non-debt, non-dilutive short-term funding solution.
A more typical rate for any deal in the 250k/month area is 2%. Remember, that’s a discount that you sell your A/R under. In the simplest of terms, you get cash today for 98% of your sale. Business owners can see that it sure is better to have a decent gross margin if you are going to give up that 2% in profits to generate cash flow.
Factors Affecting Pricing
Factors that affect your actual pricing are typically the ones that confuse clients the most.
They include the ‘holdback’ rate we spoke of, i.e. the 10% that is held back on each invoice and remitted back to you when your client pays. Additionally, your credit score can significantly impact the pricing of receivable financing, as it reflects your creditworthiness and can affect the terms and rates you're offered.
Time Is Money
The largest factor in receivable financing factoring cost is the time it takes your customer to pay. Ensure that you fully understand the 'per diem' or daily cost of every day your client doesn’t pay. A great strategy is to finance your quicker-paying customers if you can.
Watch Out for Fees
Miscellaneous fees are levied by many of the factoring firms in Canada, including factoring companies that might collateralize and finance accounts receivable.
This has been a real ‘bugaboo’ with us, as these fees can add up and increase your financing cost. Choosing the right factoring company can help minimize these fees by offering transparent terms and focusing on the benefits of accessing cash flow without the need for traditional bank borrowing. Make sure you know what they are, and try and negotiate them down or out of your agreement.
Recommended Facility
Our recommended facility is the confidential invoice facility. It allows you to bill and collect your own receivables without any notice to clients, suppliers, etc. And the cost of that? It should be the same if you are dealing with the right firm and advisor.
Key Takeaways
These financial services play crucial roles in managing cash flow and mitigating risks for businesses:
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Invoice Factoring: This involves selling invoices to a third party (the factor) at a discount. It accelerates cash flow as the accounts receivable finance company provides immediate funds rather than waiting for customers to pay their invoices in full. The factor then collects payment from the customers.
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Accounts Receivable Financing: Similar to invoice factoring, this method uses unpaid invoices as collateral to secure financing. Instead of outright selling the invoices, a business borrows against the value of its outstanding invoices, using them as collateral for a loan.
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Working Capital Loans: These loans are designed to cover short-term operational expenses such as payroll, inventory restocking, or equipment purchases. They help businesses maintain daily operations and seize growth opportunities without sacrificing liquidity.
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Business Cash Advances: This option provides quick access to cash by advancing funds based on future credit card sales or receivables. It's particularly useful for businesses with consistent credit card transactions, such as retail stores or restaurants, as repayment is typically made through a percentage of future sales.
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Credit Risk Management: Assessing and managing the risk associated with extending credit to clients is vital for maintaining financial stability. This involves evaluating the creditworthiness of customers, setting appropriate credit limits, monitoring payment behaviors, and implementing strategies to mitigate the risk of default.
Conclusion
Daily mechanics, who you are dealing with, and reading the fine print tend to be a challenge for the business owner or financial manager that simply wants to run their business. Receiving a cash advance for outstanding invoices is a crucial aspect of receivable financing, offering an immediate boost to cash flow by leveraging unpaid invoices. Speak to a trusted, credible and experienced Canadian business financing advisor for assistance in understanding receivable finance costs.
FAQ:FREQUENTLY ASKED QUESTIONS / PEOPLE ALSO ASK / MORE INFORMATION
What is receivable financing, and how does it benefit my business?
Receivable financing, also known as invoice factoring, involves selling outstanding invoices to a financing company at a discount in exchange for immediate cash.
This process provides businesses with quick access to capital to meet various financial needs, such as covering operating expenses, expanding operations, or managing cash flow. The benefit lies in improving cash flow without waiting for customers to pay invoices, enabling businesses to seize growth opportunities and maintain stability.
How does receivable financing differ from traditional bank loans?
Receivable financing differs from traditional bank loans in several ways.
Unlike bank loans, receivable financing is based on the value of outstanding invoices rather than the business's creditworthiness or collateral. Additionally, receivable financing provides immediate cash without adding debt to the business's balance sheet. It offers flexible funding that grows with the business's sales volume, making it an attractive option for businesses with fluctuating cash flow or limited credit history.
Can businesses with poor credit history still qualify for receivable financing?
Yes, businesses with poor credit history can still qualify for receivable financing with accounts receivable financing companies.
Unlike traditional bank loans, accounts receivable factoring is primarily based on the creditworthiness of the business's customers and the quality of its outstanding invoices. As long as the business's customers have a strong payment history and the invoices are deemed collectible, it can still access receivable financing regardless of its credit history.
What are the typical fees associated with receivable factoring?
The typical fees associated with receivable financing include a discount fee or factor fee, which is a percentage of the invoice value deducted by the financing company as compensation for advancing funds.
Additionally, there may be other fees such as a due diligence fee, processing fee, or administrative fee. These fees can vary depending on factors such as the financing company's terms, the creditworthiness of the business's customers, and the volume of invoices financed.
How quickly can businesses access funds through receivable financing?
Businesses can typically access funds through receivable financing within a few days of submitting their invoices for financing.
The speed of funding in invoice financing depends on factors such as the efficiency of the financing company's application process, the quality and volume of the invoices, and the creditworthiness of the business's customers. Receivable financing offers a quick and efficient solution for businesses in need of immediate cash to meet their financial obligations or seize growth opportunities.
