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INVOICE FACTORING FOR CASH FLOW & IMMEDIATE WORKING CAPITAL
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Financing & Cash flow are the biggest issues facing business today
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7 Park Avenue Financial
South Sheridan Executive Centre
2910 South Sheridan Way
Oakville, Ontario
L6J 7J8
Factoring companies in Canada offer businesses a vital financial lifeline, providing immediate access to cash flow through the sale of accounts receivable.
Struggling to secure traditional loans for your business? Discover how factoring companies in Canada can provide the financing solution you need.
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
Factoring and Working Capital in Canada. We’ve been mesmerized lately by our favourite new saying - The Past Is a Foreign Country. They Do Things Differently There! It’s from the novel ‘The Go-Between ‘. Can it pertain to Canadian Business Financing and access to working capital via invoice factoring? We think so! Let’s dig in on factoring companies in Canada
UNDERSTANDING THE COST OF CREDIT
The cost of credit is the cost of not taking credit terms extended for business financing.
When Canadian business owners extend or receive business credit via accounts receivable financing the credit terms are expressed as the amount of discount that is given for prompt payment, when the prompt payment discount expires, and when the invoice is due for outstanding invoices.These days it's not unusual, unfortunately, to have clients stretch your invoices from 30 to 90 days.
Your payment terms and ability to turn over receivables is key. Financing the balance sheet for unpaid invoices via current asset monetization is a winning formula. The overall credit quality and liquidity in your a/r base is what cash flow success is all about when it comes to invoice financing.
AN EXAMPLE OF A FACTORING TRANSACTION - INVOICE FACTORING COMPANIES
Let's look at an example. We might say that we are being offered 2% ten, net 30. What does that mean? It means that if we pay the invoice in 10 days we can subtract 2% of the invoice amount for our payment. We can assure you that your supplier if it is your firm being offered the discount truly means ten days! Not take 2% and pay in 30 days as some try to do. (Those discounts are charged back.)
HOW DOES FACTORING WORK?
Let's work through an example. Suppose you are being offered 9000.00 of credit on 2% ten net 30 days. You can either pay 9000.00 x 98% = 8820$ in ten days or of course, as we have noted, pay the full 9000.00 in 30 days. If your company is in a position to take the discount you can save a significant amount on your purchase price from that supplier.
If you wait the full 30 days you effectively borrow 8820 for 20 days, paying 9000 - 8820, or 180$ of interest.
So what is the 'credit cost' in borrowing this money? The calculation is done as follows:
Credit cost = % discount / 100-%discount x 360days/ credit period - discount period.
If you work through the numbers in our example the credit cost = 36.7%.
As our example shows, the annual percentage cost of being offered a 2 % 10 day/ net 30 days scenario is almost 37%. Remember also that this discount is continually offered, so it was offered 18 times a year the effective annual credit cost is 43%!!
SELLING ON CREDIT TERMS
Selling on credit is an accepted and important part of business. From the customer perspective, it's a source of financing because you receive goods or services that you don't have to pay for until a specific future point in time, usually 30 days more often than not. As business grows between a supplier and customer the amount of financing being extended or taken grows.
WORKING CAPITAL FACTORING SOLUTIONS ARE MORE POPULAR THAN EVER
So what is the final point of interest in our article? It is as follows. More and more Canadian firms are looking at factoring company solutions and working capital financing facilities outside of bank financing via invoice factoring services. If our business could pay cash for goods and services we would take the discounts and arrange with our bank to allow us to pay for everything in Cash!
Unfortunately, our balance sheets and income statements don't allow us to generate those sorts of bank facilities.
Factoring is the immediate sale of our accounts receivable for cash. It also can cost anywhere from 1 - 2 % per month in 'discount fees' that are taken by the factoring firm. That fee is often misunderstood as an interest rate, which it is not.
IS FACTORING EXPENSIVE?
Is that expensive? Yes. And maybe not!
As we have seen if we can sell our receivables immediately for cash and then take supplier discounts we can offset a large portion, ( maybe all ) of the financing costs. Oh, and by the way. Confidential A/R finance allows you to regain and maintain total control over your own business. You bill, collect and still get the cash flow you need.
SOME KEY BENEFITS OF FACTORING
That allows us to be in the best of stead with our suppliers - We have the cash to pay our bills and we receive immediate cash for our invoices. In a high-growth scenario that's worth its weight in gold so to speak! Factoring can serve the dual purposes of generating significant cash flow and receiving significant price or payment discounts from our preferred major suppliers.
KEY TAKEAWAYS
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Immediate Cash Flow: Factoring provides quick access to cash by purchasing outstanding invoices, eliminating the need to wait for customer payments.
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No Debt Creation: Unlike traditional loans, factoring doesn't create debt for your business. Instead, it leverages accounts receivable to provide funds, making it suitable for businesses with fluctuating sales or credit challenges.
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Flexible Financing: Factoring caters to businesses of all sizes, from startups to established companies, offering a flexible financing option to improve cash flow and manage trade payable financing.
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Quick Funding: Factoring companies typically provide funding within a few days of approving invoices, addressing cash flow challenges swiftly.
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Collections Management: In case of non-payment, factoring companies may handle collections directly with customers, relieving businesses of collection burdens.
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Invoice Selection Flexibility: Many factoring companies allow businesses to choose which invoices to factor, enabling them to manage cash flow according to their needs.
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Industry Coverage: Factoring services are utilized across various industries in Canada, including oil and gas, manufacturing, transportation, staffing, and healthcare, addressing the unique cash flow challenges of different sectors.
CONCLUSION
That is a winning cash flow combination via factoring services! So, yes, times are changing in business finance. It’s not the past. Seek out and speak to a trusted, credible and experienced Canadian business financing advisor who can assist you with financing solutions for your cash flow needs and how to properly leverage invoice factoring.
FAQ FREQUENTLY ASKED QUESTIONS
What are the benefits of using a factoring company in Canada?
Factoring companies in Canada provide a financial solution for SME small businesses by providing immediate cash flow by purchasing your outstanding invoices, allowing you to access funds quickly without waiting for customer payments.
How does invoice factoring differ from traditional loans for Canadian businesses?
Unlike traditional loans, term loans, and equipment financing, invoice factoring doesn't create debt. Instead, it leverages your accounts receivable to provide immediate cash flow, making it an ideal solution for businesses with fluctuating sales or credit challenges.
Can businesses of all sizes benefit from factoring services in Canada?
Yes, factoring services and the factoring process cater to businesses of various sizes, including small and medium enterprises. Whether you're a startup or an established company, factoring offers a flexible financing option to improve cash flow and help with trade payable financing. Purchase order financing can often be a component and work with an a/r financing solution.
What are the typical rates charged by factoring companies in Canada?
Factoring rates vary depending on factors such as invoice volume, industry risk, and the creditworthiness of your customers. It's essential to understand these rates and how they impact your overall financing costs.
Are there any eligibility criteria businesses need to meet to work with factoring companies in Canada?
While eligibility criteria may vary among factoring companies, businesses typically need to have invoices from creditworthy customers. Factors such as invoice quality, customer creditworthiness, and the absence of legal or tax issues may also be considered.
How quickly can a business receive funding through invoice factoring in Canada?
Factoring companies in Canada typically provide funding within a few days of approving your invoices, offering a swift solution to cash flow challenges.
What happens if customers fail to pay the invoices purchased by a factoring company in Canada?
In the event of non-payment, the factoring company may handle collections directly with your customers. However, specific procedures may vary based on the terms outlined in your factoring agreement.
Can businesses choose which invoices to factor in with Canadian factoring companies?
Yes, many factoring companies in Canada offer flexibility in selecting which invoices to factor. This allows businesses to manage cash flow according to their immediate needs and preferences in their cash flow management when they choose to receive a cash advance on the invoice.
How does recourse factoring differ from non-recourse factoring in Canada?
Recourse factoring holds your business responsible if your customers fail to pay the invoices, while non-recourse factoring protects against customer insolvency or non-payment of the invoice value.
What industries commonly utilize factoring services in Canada?
Various industries benefit from factoring services in Canada, including oil and gas companies, manufacturing, transportation and trucking companies, staffing, and healthcare. An invoice Factoring company can address the unique cash flow challenges faced by businesses across different sectors. AR financing is a solid alternative to traditional business loans.
Are there any regulatory considerations or legal implications associated with factoring companies in Canada?
While factoring is a legal and regulated financing option in Canada, businesses should be aware of any provincial or federal regulations that may impact their factoring agreements. Consulting with legal professionals familiar with commercial finance can provide clarity on these matters.
