YOUR COMPANY IS LOOKING FOR BUSINESS FINANCE SOLUTIONS VIA A/R FACTORING!
Maximizing Cash Flow: Mastering Receivables Factoring
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Financing & Cash flow are the biggest issues facing business today
ARE YOU UNAWARE OR DISSATISFIED WITH YOUR CURRENT BUSINESS FINANCING OPTIONS?
CONTACT:
7 Park Avenue Financial
South Sheridan Executive Centre
2910 South Sheridan Way
Oakville, Ontario
L6J 7J8
Direct Line = 416 319 5769
Email = sprokop@7parkavenuefinancial.com
"Receivables factoring transforms financial roadblocks into strategic opportunities for businesses grappling with cash flow challenges."
"Unlock the power of your unpaid invoices – turn them into immediate cash flow today!"
INTRODUCTION - ACCOUNTS RECEIVABLE FINANCING FACTORING IN CANADA
Canadian business owners and financial managers are hearing more and more about the concept of 'factoring 'their accounts receivable as a cash flow solution and overall strategy. Increasing numbers of companies are investigating what most people consider to be an 'alternative financing' strategy.
Let’s dig in.
Receivables factoring, a financial tool as old as trade itself, is experiencing a modern resurgence. In a world where cash flow is king, it transforms outstanding invoices into immediate capital. Often misunderstood, factoring is not a loan; it's an advance against your company's receivables.
By selling your invoices at a discount to a factoring company, you unlock cash tied up in unpaid bills, bolstering your liquidity without taking on debt. This strategy empowers businesses to maintain operations, invest in growth, and navigate financial uncertainties with greater ease.
WHAT DOES IT MEAN TO FACTOR ACCOUNTS RECEIVABLE? ACCOUNT RECEIVABLE FACTORING EXPLAINED!
A/R Finance, aka ' factoring ' is simply a way to finance accounts receivable by in effect ' selling ' those receivable as you generate sales. The receivables are sold at a ' discount ' typically in the 1.5-2% range, which is the financing cost in the transaction, not to be confused with an interest rate.
DIFFERENT NAMES / SAME THING FOR FACTOR RECEIVABLES SOLUTIONS
Factoring goes under various names, which can often be confusing to the Canadian borrower - some of those terms for this method of financing are :
Invoice Discounting
A/R Finance
Receivable Financing
Confidential Receivable Financing /Non-Notification Factoring
Bottom LINE? Don't let factoring meaning terms confuse you!
'Alternative ', when it comes to factoring finance is in the context of an alternative to a Canadian chartered bank line of credit.
As Canadian companies build up their investments in accounts receivable ( and inventory ) they are finding it more difficult than ever to ensure that their customers are paying them on time, typically not receiving those payments in 30 days per the terms they provide to their customers.
Naturally, the current somewhat difficult economic environment as we head into the 2024, lends itself to slow-paying receivables.
Management, therefore, is paying more and more attention to managing cash flow, and, most notably, this is taking more and more of senior management and business owners time. That's where factoring of accounts receivable comes in!
The basic challenge is as simple as it gets - suppliers, landlords, and, dare we say it, your employees want to get paid on time, while the source of that cash is tied up in receivables that are paid in, many times 60-90 days.
Enter the accounts receivable factor as a potential solution that will allow the Canadian company to benefit from increased cash flow, albeit at a cost. Just to be clear, the term factoring is also referred to as 'invoice discounting' and 'accounts receivable financing, as we noted previously.
The mechanics at the outset seem overly simple. You send your invoice (or invoices) to the 'factor' firm who immediately, usually the same day, sometimes next day, issues you funds for that invoice or group of invoices. All of a sudden you immediately have the working capital and cash flow to run your business.
Let's be clear, this is not a loan per se. Factoring is an immediate advance of funds against money owing to your firm for the products and services you have delivered. We used the alternate term 'invoice discounting' as noted above. The ' factoring discount 'referred to is the amount of the finance charge the lender keeps for carrying the receivable.
A SHORT TERM WORKING CAPITAL SOLUTION
We can't overemphasize the fact that the funds generated from an accounts receivable financing facility such as we have described should be used for short-term working capital needs. You need to view the factoring facility in the same manner as your bank line of credit (if you had one!)
So more about the potential 'benefit 'of factoring accounts receivable that we have alluded to. We can somewhat easily say that a factoring facility can be set up in a fairly short time, certainly in much less time than it would take for your firm to negotiate a bank cash term loan or a Canadian chartered bank line of credit.
Another benefit of factoring accounts receivable? It's simply that you receive that much-needed cash the same day. A very significant amount of the invoices, usually 80-90% is 'advanced 'to your firm the same day. The difference is held back as a temporary holdback and remitted to your firm, less the finance fee when your customer pays.
WHAT IS THE COST OF FACTORING RECEIVABLES
COST OF FACTORING EXPLAINED - FINALLY!
We have focused on some of the benefits of factoring, such as the strong cash flow aspect of this type of facility, and its ease of setup once you have found a solid partner firm. However, the receivable factoring cost of the facility is usually between 1 – 2 % of the invoice amount for 30 days - Naturally, you entered into such a facility because your customers probably weren't paying you in 30 days already, so you can see that the financing fees can add up. That's the importance of asset turnover and staying on top of your receivables.
KEY TAKEAWAYS
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Factoring Fundamentals: Receivables factoring involves selling your outstanding invoices to a third party, a factoring company, at a discount. This transaction provides immediate cash flow from these yet-to-be-paid receivables.
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Cost and Rates: The factoring company charges a fee, typically a percentage of the invoice value. These rates in the factoring agreement vary based on factors like volume, industry risk, and invoice duration.
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Recourse vs. Non-Recourse: In recourse factoring, if the debtor doesn't pay, you must buy back the invoice or replace it with a different one. Non-recourse factoring, usually more expensive, means the factoring company assumes most of the risk of non-payment.
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Immediate Liquidity: Factoring converts accounts receivable into immediate cash, enhancing your business’s liquidity and enabling quicker reinvestment and growth.
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Credit Consideration: The factoring company focuses on the creditworthiness of your customers, not your business, which can be advantageous if you're a new or growing company with limited credit history.
CONCLUSION
Understanding how factoring works and that it is simply the cash flow of your receivables as a discount is key.
Your company should investigate this method of Canadian Business Financing if you need to generate cash flow in advance of the time involved in carrying account receivable assets. The freeing up of that cash allows your firm to fund daily operations and explore opportunities to grow your business...
Understanding how factoring companies price their service is key to a successful facility. Some of the factors that are associated with the final facility include specific issues around your industry, the size of your facility, the number of invoices you generate monthly, and the overall credit profile of your firm as well as your customer base. The most successful companies utilizing factoring place a heavy emphasis on reducing their days sales outstanding, aka ' DSO ' thereby lowering the factor discount fees.
In some cases, firms might choose to negotiate a non-recourse facility, with the lender absorbing all credit risk associated with the facility - that, of course, comes with a higher discount rate based on the facility's credit profile.
So, as in all business evaluations, there are trade-offs - if your firm can absorb the financing costs with adequate profit margins on your products and services you can categorically benefit from receivable factoring, aka a real working capital facility!
Call 7 Park Avenue Financial, a trusted, credible and experienced Canadian Business Financing Advisor with a track record of success.
FAQ: FREQUENTLY ASKED QUESTIONS / PEOPLE ALSO ASK / MORE INFORMATION
How does factoring receivables work?
Factoring receivables is a financial transaction where a business sells its accounts receivable (i.e., invoices) to a third-party factoring company at a discount. This process involves several key steps:
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Invoice Issuance: Your business provides goods or services to your customers and issues invoices for these transactions.
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Selling Invoices: Instead of waiting for your customers to pay these invoices, you sell them to a factoring company. The factoring company assesses the risk and creditworthiness of your customers (not your business) before agreeing to purchase these invoices.
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Immediate Payment: After the accounts receivable factoring company approves the invoices, they provide you with an advance payment. This cash advance is typically a significant percentage of the total invoice value, usually around 80% to 90%.
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Collection Process: The factoring company then takes over the responsibility of collecting the invoice payments from your customers. This step in invoice factoring shifts the burden of credit control and collections from your business to the factoring company.
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Receiving the Balance: Once your customers pay their invoices to the factoring company, the company will pay you the remaining balance of the invoices, minus their fees and the amount advanced to you initially.
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Factoring Fees: The factoring company charges fees for this service, which can include a factoring fee based on a percentage of the invoice value and other additional fees. These fees compensate the factoring company for the risk they assume and the service of managing the receivables.
The key benefits of receivables factoring include improved cash flow, transfer of credit risk, and the ability for businesses to focus on core operations without worrying about the collection process. It's particularly beneficial for businesses that need immediate cash and have customers who typically take longer to pay.
How does receivables factoring benefit my cash flow?
Receivables factoring boosts cash flow by providing immediate funds based on your outstanding invoices, reducing the wait for customer payments.
Is receivables factoring suitable for all business sizes?
Absolutely, from startups to established firms, receivables factoring can be tailored to suit various business sizes and needs.
Does my business's credit score impact factoring?
The focus in receivable factoring is more on your customer's creditworthiness, making it an ideal solution for businesses with limited credit history.
What are the typical costs associated with receivables factoring?
Costs vary but generally include a percentage fee of the invoice value, depending on factors like invoice volume and debtor's credit risk.
Can receivables factoring be used for any type of invoice?
Mostly, yes. Factoring applies to a wide range of industries and invoice types, though terms may vary depending on the sector.
What determines the fee for factoring services?
The fee is influenced by factors like the total invoice amount, payment terms, and the creditworthiness of your debtors.
Are there different types of receivables factoring agreements?
Yes, including recourse and non-recourse factoring, each with different levels of risk and cost structures.
How quickly can I receive funds through receivables factoring?
Typically, funds are available within 24 to 48 hours after the factor approves your invoices.
Does Accounts Receivable factoring affect my relationship with customers?
Factoring should not negatively impact customer relations; many businesses transparently use it as part of their financial strategy. Confidential receivable factoring allows a company to bill and collect it's invoices
Can I choose which invoices to factor?
You can select specific invoices or customers for factoring based on your immediate cash flow needs when you are factoring accounts receivable
How does receivables factoring differ from a loan?
Unlike a loan, factoring doesn't create debt or require collateral. It's an advance on your accounts receivable. That is the difference around the term factoring loans receivable
Is receivables factoring a sign of financial distress?
Not necessarily. Factoring receivables is often used as a strategic tool for managing cash flow and can indicate proactive financial management.
Can I factor invoices from international customers?
Yes, many factoring companies accommodate international invoices, but terms may vary due to increased risks and complexities.
