Canadian business owners and financial managers often ask about assessing the different alternatives to their overall business financing strategy – Receivable financing – factoring can be one of the cornerstones of a creative alternative financial solution for their business.
ALTERNATIVE FINANCING?
We sometimes hesitate to use the word ‘alternative' because quite frankly this method of financing is becoming as mainstream as things can get!
Canadian business can be financed in one of four different ways – You need to be able to assess the methods utilized in those four categories and which one, or ones, makes sense for your firm.
Business is financed of course by your own shareholder equity – Equity is expensive because when you give it up, or sell ownership in your business your overall position becomes diluted and your return on investment diminishes.
4 WAYS TO FINANCE A BUSINESS IN CANADA
The three other methods of financing, in lieu of equity of ownership relinquishing, are:
Debt
Grants / Government Loans
Asset Financing
Debt of course comes in the form of good debt and bad debt – we would, as an example categorize a commercial mortgage as good debt – a cash flow working capital loan might be another example. However, the reality is that most business owners recognize the dangers of debt and how that increased leverage can be a double-edged sword.
Clients are always asking us about ‘government grants and loans'. In our opinion there are only two respectable grant/loan programs in Canada – the SR&ED program, and the CSBF program – the former is a non-repayable grant for refundable tax credits, the latter is simply a great government loan for financing equipment and leaseholds.
ASSET MONETIZING FOR CASH FLOW
So that brings us to # 4 - Asset financing / Receivables finance. Depending on the type of business and industry you are in your assets include inventory, land, equipment, and receivables.
Prior to assessing what business financing solution works best for your business owners and financial managers should consider key issues such as the amount of business capital needed around regular or seasonality in the business -
A firm's DSO ' will provide a solid picture of asset turnover in the company's investment in receivables. Some businesses for a variety of reasons may wish to explore a short-term working capital loan as an alternative to finance receivables. But any business that finds itself in the position of daily challenges around working capital and irregular cash inflows should consider some form of cash flow financing.
Also to be considered are the costs of a/r financing compared to other business loans as well as traditional bank loans.
HOW MUCH CASH CAN BE FREED UP IN YOUR BUSINESS
A very strong case can be made that #4 should in fact be #1 when it comes to working capital and cash flow financing – Simply speaking your assets need to be monetized in the best manner in which to bring you liquidity.
HOW ACCOUNTS RECEIVABLE FINANCING WORKS
Receivable financing – factoring is in fact the quickest and most efficient manner to bring immediate cash flow to your business. Why is that the case – simply because it involves no debt coming on our balance sheet, no payments are made as in a loan type scenario, cash flow is immediate, and the reality is, that if you have negotiated the right factor facility then you are in control of your overall cash flow requirements?
BENEFITS OF A/R FINANCING
The benefits of a receivable financing factor facility are very clear once you understand the process.
Generally, a factoring facility, aka an invoice discounting or receivable financing facility can be negotiated in a couple of weeks from start to finish. To the extent that your business is growing you essentially have successfully completed a financing that gives you unlimited cash flow. We say unlimited because if your sales and receivables grow your cash flow and working capital grow in lockstep to that growth!
Cash flow and working capital from a factoring facility can be used to increase inventory, take on more purchase orders and contracts, and, in general, meet working capital guidelines.
Numerous other benefits to your business may include:
- Unlimited financing capabilities of commercial non-bank lenders
- Faster approvals versus traditional bank financing approval timelines
- A/R financing is typically ' covenant light ' - no restrictive covenants around financial statements, maintenance of financial ratios, etc
- The right facilities chosen will not have a term commitment and minimal or no set-up fees
- When combined with asset based lending solutions inventories can also be included in the facility
- Typical advances on a/r loans are in the 90% range, significantly higher than bank advances - in some cases an over advance might be possible
- No external or personal collateral of business owners is required
- A smaller company with poor credit or simply a lack of credit history can still qualify based on the quality of their customer base
ARE YOU ELIGIBLE FOR RECEIVABLE LOAN SOLUTIONS?
Any Canadian company selling on trade credit via business-to-business for their products or services is a candidate for A/R finance - the accounts receivables can be both domestic, U.S. or international. Invoices under 90 days old can be financed for company clients that are generally credit-worthy.
A receivable factoring facility is a simple-to-understand business financing solution. Invoices are either pledged or sold, allowing the company to receive up to 90% of the invoice as cash in the business bank account immediately on invoicing. The business receives the balance of the invoice less a ' discount fee' or ' factoring fee' which is in the .75% - 1.25% range.
WHAT IS THE COST OF RECEIVABLE FINANCING/FACTORING
Discount fees, or as clients prefer to call them, ‘factoring rates' vary in Canada. Factors (excuse the pun) that affect your fee are the size of the facility, who you deal with, the method in which your facility operates, and the overall quality of your customer base.
The cost of a/r finance will vary depending on the type of bank or commercial finance firm you do business with - The combination of fees or interest rates will determine the costs of financing liquid assets such as receivables.
CONCLUSION - RECEIVABLE FINANCING FACTORING WORKING CAPITAL PROBLEMS AND SOLUTIONS
Any firm that has slow accounts receivable turnover based on the payment habits of clients can benefit from financing current assets such as receivables via accounts receivable financing companies - As a company grows it requires a higher investment in those current assets such as inventories and a/r. Firms are also subject to bad debt risk which can be offset by strong credit policies or trade credit insurance. The ability to bridge the gap from invoice to the collection of outstanding invoices is key to business success.
Speak to 7 Park Avenue Financial, a trusted, credible, trusted, experienced Canadian business financing advisor – Find out today why the 4thmethod of financing your business might just be the best!
FAQ: FREQUENTLY ASKED QUESTIONS / PEOPLE ALSO ASK / MORE INFORMATION
What is accounts receivable financing?
Financing receivables via a bank or factoring company/financing company allows a business to cash flow outstanding invoices on the company's balance sheet. Small businesses can achieve early payment, ie a cash advance for liquid assets such as accounts receivable - Companies should avoid long-term contracts which some traditional factoring companies market,
This is a business finance method for the amount owed by clients, and is not a personal finance solution and allows for business growth.
Traditional factoring is when a business sells invoices to receive cash immediately. That early payment allows the company to collect money owed and fund day to day operations of the business. Some or all of a company's - The ability to get funding via the cash flowing of unpaid invoices is used by thousands of businesses in Canada. There are different types of business factoring, such as invoice discounting, confidential receivable financing, and a credit facility combined with inventory advances for small business needs.
Certain facilities have higher fees, and businesses need to understand they are still responsible for credit risk unless they choose a non-recourse type of factoring to reduce non payment risk.
