YOUR COMPANY IS LOOKING FOR BUSINESS CASH FLOW VIA SALES OF RECEIVABLES!
Cash Now, Not Later: The Power of Business Factoring
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Financing & Cash flow are the biggest issues facing business today
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Insights from 7 Park Avenue Financial because we are breaking down how factoring can transform your receivables into ready cash and drive your business forward
Immediate Cash Flow: Understanding Factoring for Your Business
Introduction to Factoring as a Cash Flow Strategy
When Canadian business owners and financial managers contemplate sales of receivables as a business cash flow strategy, often the cost and understanding the dynamics of that cost is top of mind.
In general, A/R financing, aka 'factoring', is somewhat understood in the Canadian business financing marketplace. And if it isn’t understood, it certainly is not as well-known as its mechanics, benefits, and how to do it the proper way.
The Realities of Cash Flow Challenges
We have often thought that it's simply that when firms are usually entertaining a new cash flow or working capital strategy it's because 'dire straits' have set in, and the company finds itself short of cash or generally unable to meet obligations on both operating expenses and other debt such as equipment leases, etc.
Internal Solutions to Cash Flow Problems
We have often preached that some of those basic problems can be fixed without external financing, i.e., a stricter credit-granting policy, and better-matching payables outflows to A/R inflows.
Embracing Accounts Receivable Financing
However, when it’s absolutely certain that a new business financing strategy is required, A/R financing is certainly one that thousands of firms are considering every day. Why? Simply because it brings fast efficient cash flow to your firm through the sales of receivables.
How A/R Finance Works
The way that receivable financing works couldn’t be simpler - that's why we're often dismayed when we learn clients have been misinformed or led astray on pricing and factoring mechanics on the day-to-day operations... simply speaking... how it works!!
The Key Benefit of Factoring
If we had to simply one key benefit of factoring pricing, it’s simply that you are only paying for the financing you are using.
Using a simple (that’s our style by the way!) example of a 100.00 invoice, it works as follows. As soon as you generate the invoice and can validate internally that you have shipped or earned the revenue for your product or service, you receive a large amount, typically 90%, as an immediate payment for the sale of that invoice.
Addressing the 10% Holdback
We can hear you already. ‘What about that other 10%?’ The industry terms that the holdback and you get that back, less the financing cost, as soon as your customer pays.
And by the way, if you have a number of accounts, and are utilizing an a/r finance strategy, doesn't it make common sense to sell, or 'factor', your better-paying customers? That’s because, as we have said, you only pay for what you use and your financing costs are decreased with those better-paying customers.
Overlooking the Benefits Versus Costs - Factoring Costs in Canada
Many of the benefits of factoring are overlooked because of the cost factor. We won’t even mention that your company now has the ability to simply survive sometimes, but more importantly, think Sales! Revenue!
It's these lost opportunities that no longer are 'lost' since you are now immediately cash flow positive - what an exhilarating feeling that must be. Instead of uncollected A/R, the left-hand side of your balance sheet now shows 'cash on hand’!
In Canada, the 'fee' to sell a receivable is in the 1-1.5 % range on a monthly basis.
The danger is when clients compare this directly to commercial bank interest, which in many ways is the wrong analogy. And remember, there is no debt here; you're monetizing or cash-flowing assets on your balance sheet. In many cases, we see you now have the ability to double your revenue without taking on additional debt, if, in fact, that debt was available to you.
Factoring as a Business Intelligence Tool?
Often overlooked is the idea that factoring can serve as a business intelligence tool. By engaging in factoring, businesses are not just receiving advance payments but also valuable feedback on the creditworthiness and payment behaviour of their clients. This data can inform credit policies, sales strategies, and even product development by highlighting which offerings lead to quicker invoice settlements.
Conclusion: Factoring as a Path to Growth
Looking for the inside scoop? Call 7 Park Avenue Financial, a trusted, credible and experienced Canadian business financing advisor who can assist you in ensuring that sales of receivables as a business cash flow strategy, if done properly, with the right partner, is a solid path to growth and success in your business funding strategy.
FAQ
What exactly is business cash flow factoring?
Business cash flow factoring, or A/R financing, is a financial strategy where a company sells its accounts receivable (invoices) to a third party (a factor) at a discount to get immediate cash - thereby eliminating the cash flow gap as the business owner waits for customers to pay
How does factoring improve my business cash flow?
Factoring/invoice financing provides you with immediate cash by selling your credit terms invoices, giving you the liquidity to meet expenses, invest in growth, and manage your business more effectively.
What are the main benefits of using factoring as a financing strategy?
The main benefits include improved cash flow, no new debt, the ability to leverage better payment terms, and the opportunity to grow your business without waiting for customers to pay.
Is factoring a loan?
No, invoice factoring is not a loan as in traditional bank loans. It is the purchase of your accounts receivable by a factoring company for immediate cash for your company's cash flow needs - so you're not incurring debt but rather accelerating cash flow from sales already made with the benefit of solving the company's cash flow needs.
Are there any downsides to factoring my receivables via invoice factoring services?
While accounts receivable factoring offers an immediate cash advance, it comes at a cost (typically a factoring fee of 1-1.5%). It's important to weigh the benefits of immediate liquidity against the costs of the service. Most factoring is recourse factoring, so collection and bad debt risk remain with the company.
Can factoring affect customer relations
Most factors operate discreetly, and your customers may not even be aware that you're using a factoring service such as Confidential a/r financing/non-notification finance.
What types of businesses can use factoring?
Almost any business that generates invoices can use factoring. It is especially useful for businesses that have long invoice payment terms but need cash sooner to operate smoothly.
How quickly can I get cash through factoring?
In many cases, the third-party factoring company allows you to receive cash either same day into your business bank account or at latest within 24 to 48 hours after the factor verifies the invoices you want to finance.
Is there a minimum or maximum amount I can factor?
Factors often have minimum and maximum amounts they will finance, which can vary widely. It's best to consult with individual factoring companies to understand their terms.
Do I need to factor all of my invoices?
No, you can choose which invoices to factor with invoice factoring companies. Receivable factoring offers flexibility for you to manage cash flow according to your business needs and control the cost of factoring services and improve cash flows from slow paying customers.
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