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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
Suite 301
Oakville, Ontario
L6J 7J8
Direct Line = 416 319 5769
Email = sprokop@7parkavenuefinancial.com
REVENUE IS VANITY - PROFIT IS SANITY - BUT CASH FLOW IS KING
Tired of waiting for payments? Turn your invoices into instant cash and fuel your business growth today!
RECEIVABLE FINANCING CANADA
Asset-based invoice finance solutions, also known as ‘ receivable factoring/invoicing financing ‘ , have become a ‘ steady as a fault ‘ business finance solution for thousands of Canadian businesses, which utilize them as their main working capital source.
Factoring companies in Canada are crucial in providing these asset-based invoice finance solutions, helping businesses improve their cash flow and access necessary capital. Why asset-based lending, and how does it work? Let’s dig in.
RECEIVABLE FINANCING
Accounts Receivable financing/factoring provides companies with an efficient and, most importantly, fast method to finance sales based on the overall credit profile of their customers.
Small and medium-sized companies (SMEs) in Canada utilize this financing method when traditional financing may not be available through banks or others. These facilities are more complex when they are part of an asset-based loan and non-bank line of credit similar to bank credit lines.
We can make the case that asset-backed invoice financing could be called ‘ ABL light ‘ - it is utilized for firms that don’t require full-service non-bank lines of credit that require monetizing and funding your inventories and fixed assets such that an asset-based line of credit would.
Factoring services include financing receivables, credit underwriting, and collection support, making them a comprehensive financial solution for businesses.
One expert has stated it quite nicely—invoice finance is quicker and easier to implement than asset-based loans, and those ABL full liens are much easier to get approved for than traditional Canadian bank finance.
Thousands of businesses in Canada find it a challenge to manage their businesses from ‘ get up and go ‘ to a ‘ get up and grow ‘ stage. Firms that are new, smaller, or financially challenged in some way find it even more difficult…
WHY FINANCE RECEIVABLES
Although the cost to finance accounts receivable is in the 1.5-2% range, which, of course, necessitates reducing that amount from your profits, thousands of Canadian companies use this method of funding operations to increase their business funding and take some of the pressure off the process of collecting your receivables promptly.
All business financing in Canada comes with a cost and risk. While many firms shy away from this method of financing the balance sheet solely due to cost, they often don’t realize the true cost of carrying their own receivables and the management focus required on that issue.
And of course, you are still responsible for any bad debt.
Also, utilizing facilities such as CONFIDENTIAL RECEIVABLE FINANCING allows you to avoid any of the ‘notification’ aspects of this finance method - enabling you to bill and collect your receivables!
SO HOW DOES ALL THIS WORK?
So how does this all work? It’s simpler than you might think. Since your accounts receivable are typically your company's largest next to liquid cash asset, this asset becomes your short-term financing strategy.
The result? With the right solution, you can now meet payrolls, buy products and services, and… dare we say it… grow your business.
By ‘ pledging’ your receivables as the asset you are ‘ monetizing, ‘you’re, in effect, securing ongoing short-term lending via an asset-based financing solution.
It’s important to emphasize that this is not a loan/debt scenario. The Accounts Receivable factoring paperwork/security documents position your company as selling your receivables as you generate sales to access the cash flow you need.
This improved cash flow management enables you to cover operational expenses, invest in growth opportunities, and maintain financial stability without waiting for customer payments.
DO BANKS OFFER INVOICE FACTORING?
While Canadian chartered banks have ‘dabbled’ in asset-based invoice finance/invoice factoring, the reality is that on balance 99.9% of all receivable invoice financing is done via a pure factoring company or commercial finance firms who compete with the banks for your working capital business credit lines.
Factoring providers offer a viable alternative to traditional bank financing, providing businesses with the necessary capital to manage their operations effectively.
If it were all about price and rate, the banks would win hands down, given that commercial receivable financing from factor firms is more expensive than those low bank rates. The reality is that many businesses can’t qualify for the amount of funding they need, in part or in whole.
If you’re looking for even better news about how these facilities work, consider looking into Confidential Receivable Financing. This allows you to garner all the benefits of ‘traditional’—aka ‘old school’ factoring—but gives you the power to do all the invoicing and collecting with no notice to your clients, suppliers, etc. This eliminates the ‘notification’ required by old-school firms that insist your clients be notified of what’s happening.
5 REASONS WHY CANADIAN COMPANIES UTILIZE ASSET BASED ACCOUNTS RECEIVABLE FINANCING
Most firms that utilize asset-based financing via a factoring company invoice finance facility do this as a bridge to going back to accessing traditional bank capital. Typical current scenarios in their businesses include:
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An urgent requirement for cash flow
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Inability to get Canadian chartered bank financing
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Requiring more cash flow than is typically available
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High growth
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The requirement to carry higher levels of inventory and A/R
Invoice factoring services are an effective financial solution for businesses facing these challenges, providing immediate access to working capital.
THE A/R RECEIVABLE FACTORING FORMULA
The formula for receivable factoring is quite simple:
Your receivables are eligible for 90% financing of your month-end a/r for all accounts under 90 days (Note - if you have a/r over 90 days, you probably have a bigger problem)
Receivable factoring is not a loan, brings no debt to your balance sheet, is easier to get approved. Factoring companies allow you to grow almost unlimitedly if you have stable or increasing revenues.
Three uncommon takes on invoice finance factoring:
- Invoice factoring as a market research tool: Businesses can gain insights into their customers' creditworthiness and industry trends by analyzing which invoices are accepted for factoring.
- Factoring as a strategy for international expansion: Businesses can use invoice finance to mitigate currency exchange risks and navigate complex international payment terms when entering new markets.
BENEFITS OF A/R FINANCE
The attraction of instant financing, as you generate sales, is key to a/r finance. Generating cash via asset finance factoring allows for the immediate reinvestment of that cash into the business - to fund operations and grow the company.
In many cases, that allows a company to take on additional projects, but in some cases, it is larger than the company might be able to take on otherwise.
The greatest advantage of debt factoring is its ability to improve cash flow. It allows businesses to instantly release the cash value of their invoices, which they can then use to operate and reinvest in the business.
At 7 Park Avenue Financial, we also point out to clients that PURCHASE ORDER FINANCING is also a solution to an SME firm taking on larger business volumes.
Companies that utilize this method of financing successfully stay on top of their receivables and use the cash they generate from this financing to fund operations, not long-term asses or corporate objectives.
Many firms utilize asset-backed financing solutions as a bridge to get back to traditional financing, and in our experience at 7 Park Avenue Financial, these facilities tend to last a year or so.
KEY TAKEAWAYS
- Understand the factoring process: Learn how invoices are converted into immediate cash, typically at a discount.
- Recognize the benefits: Improved cash flow enables quicker reinvestment and business growth opportunities.
- Identify suitable invoices: Not all receivables qualify for factoring; focus on those from creditworthy customers.
- Evaluate costs: Factor in fees and discount rates to determine if the benefits outweigh the expenses.
- Consider the impact on customer relationships: Factoring may involve direct communication between the factor and your clients.
CONCLUSION
Invoice finance factoring empowers Canadian businesses to unlock the value of their accounts receivables.
Despite some perceived costs and issues around factoring via asset finance solutions, thousands of businesses successfully utilize this method of Canadian Business Financing.
If you suspect that the bank financing you seek is somewhat remaining in the bank vaults, call 7 PARK AVENUE FINANCIAL, a trusted, credible and experienced Canadian business financing advisor who can assist you with ‘ steady to a fault ‘ asset loans and financing solutions.
FAQ
How does invoice finance factoring improve my business’s cash flow?
Invoice finance factoring converts your unpaid invoices into immediate cash, allowing you to access funds that would otherwise be tied up in accounts receivable. This improved cash flow enables you to cover operational expenses, invest in growth opportunities, and maintain financial stability without waiting for customer payments.
What types of businesses can benefit most from invoice factoring?
While invoice factoring can benefit various industries, it’s particularly advantageous for businesses with long payment cycles, seasonal fluctuations, or rapid growth. These may include manufacturers, wholesalers, service providers, and companies in industries like construction, staffing, or transportation.
Can invoice factoring help my business grow?
Yes, invoice factoring can significantly contribute to business growth. By providing quick access to working capital, it allows you to take on new projects, purchase inventory, hire staff, or invest in marketing without being constrained by delayed customer payments. This financial flexibility can help you seize growth opportunities more readily.
Is invoice factoring a form of debt?
No, invoice factoring is not a form of debt. Instead, it’s a sale of your accounts receivable. This means you’re not taking on additional debt obligations, which can be beneficial for your company’s balance sheet and credit profile.
How quickly can I receive funds through invoice factoring?
One of the key advantages of invoice factoring is the speed of funding. Typically, you can receive funds within 24 to 48 hours into your business bank account after submitting your invoices to the factoring company. This rapid access to cash can be crucial for managing urgent financial needs or capitalizing on time-sensitive opportunities.
What’s the difference between invoice factoring and invoice discounting?
Invoice factoring involves selling your invoices to a invoice financing company, which then manages the collection process. On the other hand, invoice discounting allows you to borrow money against your outstanding invoices while maintaining control over your sales ledger and collecting payments yourself. Factoring is generally more suitable for smaller businesses, while larger companies often prefer discounting for its confidentiality.
Are there any industries that are not suitable for invoice finance factoring?
While invoice factoring is versatile, some industries may find it challenging to use this financing method. These typically include businesses with very small invoice values, those dealing primarily in cash transactions, or companies with a high percentage of disputed or returned goods. Additionally, industries with complex fulfillment processes or long-term contracts may face difficulty factoring their invoices.
How does invoice factoring affect my relationship with customers?
Invoice factoring can impact your customer relationships, as the factoring company will typically handle invoice collection. However, many factors offer “non-notification” services, collecting payments under your business name. It’s important to choose a reputable factoring company that maintains professional communication with your customers to preserve your relationships.
What should I look for when choosing an invoice factoring company?
When selecting an invoice factoring company, consider factors such as their experience in your industry, the flexibility of their terms, transparency in fee structures, the quality of their customer service, and their reputation. Look for companies that offer additional services like credit checks on your customers or online account management tools.
It’s also crucial to review the contract carefully, paying attention to any hidden fees or long-term commitments.
Can invoice factoring help my business during economic downturns?
Yes, invoice factoring can be particularly beneficial during economic downturns. When traditional lending becomes more restrictive, factoring provides an alternative source of working capital. It can help maintain cash flow when customers may be paying more slowly, allowing your business to weather challenging economic conditions more effectively.
What are the main costs associated with invoice finance factoring?
The primary costs to business owners of invoice finance and factoring include the factoring fee (usually a percentage of the invoice value) and potentially a discount rate. Some factors may also charge additional fees for services like credit checks or wire transfers when the customer pays. It’s essential to understand the full cost structure and compare it to the benefits of improved cash flow and reduced administrative burden.
How does invoice factoring differ from a traditional bank business loan?
Invoice factoring companies provide immediate access to cash based on your accounts receivable without creating debt. Bank loans typically require extensive credit checks and collateral and create a debt obligation. Factoring is often faster and more flexible, especially for businesses with limited credit history or assets.
Can invoice factoring be used in combination with other financing methods?
Yes, invoice factoring can be used alongside other financing methods. Many businesses use factoring as part of a broader financial strategy, combining it with traditional loans, lines of credit, or equity financing to optimize their capital structure and meet various financial needs.
