You Are Looking For Business Accounts Receivables Financing
Accounts Receivable AR Funding Solutions
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Understanding the different types of accounts receivable financing is essential for businesses seeking to enhance their cash flow and operational efficiency.
Unlock the potential of your business with accounts receivable financing – the key to overcoming cash flow challenges.
7 Park Avenue Financial originates business financing solutions for Canadian Businesses – We offer Different Types of Receivable Financing & solutions that solve the issue of cash flow and working capital – Save time and focus on profits and business opportunities
Canadian Business Financing with the intelligent use of experience
Accounts Receivable Financing Solutions
We probably all remember the car rental company commercial... they were ‘# 2 and trying harder' ... that certainly could describe business accounts receivable financing in Canada - your company's 2nd alternative to cash flow financing after the bank.
Understanding the various types of accounts receivable financing is crucial for companies looking to improve cash flow and sustain growth when traditional financing solutions are unavailable.
Talk to the 7 Park Avenue Financial team about available accounts receivable financing solutions, giving you an insight into how your business can leverage this financial tool to optimize working capital and maintain day-to-day cash flow stability.
Why Choose Accounts Receivable Financing?
So why is # 2 and trying harder to gain so much momentum from Canadian business owners and financial managers? It's pretty simple - it becomes the de facto alternative for businesses that can't achieve the financing they need from what the industry terms 'traditional sources'.
How Does Accounts Receivable Financing Work
So, let’s examine some key basics about how financing works and differentiate it from bank working capital financing—the proverbial business line of credit.
Bank Line of Credit Collateralization
What drives the approval and the ongoing operation of a bank line of credit collateralized by your receivables?
Of course, it’s the size of your A/R base, but at the same time, other key factors must come into play. The onus is on your firm to show profitability, debt, and equity ratios that work for the bank as the lending financial institution. More often than not, it emphasizes personal guarantees and even outside collateral.
Focus of Business Accounts Receivable Financing
However, business accounts receivable financing (aka 'invoice discounting' or 'factoring’) focuses solely on your receivables. The size of your A/R and its general quality essentially determine the size of your new accounts receivable financing facility.
Key Differences Between Bank and Business Accounts Receivable Financing
The second key difference in comparing the two is that the bank, in effect, collateralizes your receivables by registering a security agreement against them. They are, in effect, 'assigned' to the bank in the event of a default by your firm.
How Business Receivable Financing Works
Business receivable financing, however, works differently, and many Canadian business owners and financial managers misunderstand this.
Under this process, you derive cash flow, if you choose, daily, as the business sells receivables, ie money owed by clients , to the finance firm, in whole or in part, on an ongoing basis.
Financing Fee Structure
That A/R is sold at a discounted price, which in effect becomes your financing fee. (Many customers view this as the interest rate - the industry views it as a discounted purchase from you at a predetermined rate, usually 1-1.5% per month.
So, we can also say that the A/R financing process, which is non-bank in nature, is a three-way agreement between yourself, your customer, and your A/R finance partner firm.
Advantages of Business Receivable Financing
Because Canadian banks are highly regulated and generally risk-averse, they cannot provide the amount of financing that thousands of small to medium-sized firms need for working capital.
But since the business A/R financing firm focuses solely on the assets, i.e., your A/R, they can generally advance up to 90% of all your A/R at any given time. So, the bottom line is that your company doesn’t have to have the capital structure required for traditional Canadian chartered bank financing.
Combining Inventory with Receivables
Clients are often pleased to hear that your non-bank partner firm can also combine their inventory into a one-stop revolving credit facility.
This provides a revolving line of credit with much more liquidity than your firm may have experienced in the past - bottom line - more access to cash flow and day-to-day working capital for operations and growth.
Choosing the Right Factoring Company Financing Partner
Clients are generally mystified by the number of firms offering this financing, what they charge, how they work daily, etc.
We recommend they consider a confidential invoice financing facility for receivables financing , allowing them to bill and collect payment on their receivables without any third-party knowledge, including your customers!
Key Takeaways
Factoring involves selling your receivables to a third-party finance company via an accounts receivable financing agreement at a discount, providing immediate cash flow. Early payments provide ongoing cash flow as sales grow without increasing the working capital investment required to carry customers.
Invoice Discounting: Like factoring, the business retains control over its sales ledger and collections process.
Asset-Based Lending: Loans are provided based on the value of accounts receivable and other assets, offering more flexibility.
Recourse vs. Non-Recourse Factoring: Understanding the difference is crucial; recourse factoring requires the business to buy back unpaid invoices, while non-recourse shifts the risk to the finance company per the terms of a factoring agreement.
Accounts Receivable Securitization: Bundling receivables on the company's balance sheet into a security that is sold to investors, generating cash flow from future income.
Conclusion
Call 7 Park Avenue Financial, a trusted, credible, and experienced Canadian business financing advisor, on how business AR financing and trade receivables financing can enhance your company’s cash flow today.
FAQ
What is accounts receivable financing?
Accounts receivable financing is a financial arrangement where businesses use their outstanding invoices as collateral to obtain immediate cash flow to finance accounts payable and other short-term obligations.
How does factoring differ from invoice discounting?
Factoring involves selling receivables to a finance company, while invoice discounting allows businesses to retain control over their receivables and collections.
What are the benefits of non-recourse factoring?
Non-recourse factoring from factoring companies transfers the risk of unpaid invoices to the finance company, protecting businesses from bad debt in supply chain finance.
Can accounts receivable financing include inventory?
Yes, some finance companies offer combined facilities, including accounts receivable and inventory, providing more liquidity.
Why choose asset based lending ABL for accounts receivable financing?
Asset-based lending offers flexibility and can provide larger financing based on the value of underlying assets such as accounts receivable and other assets such as inventory and equipment.
How does accounts receivable securitization work?
Accounts receivable securitization involves bundling receivables into a security that is sold to investors, converting future cash flows into immediate funds.
What is selective invoice financing?
Selective invoice financing allows businesses to choose specific invoices to finance, providing more control over their financing strategy.
Are there any risks associated with accounts receivable financing?
Risks include potential fees, impacts on customer relationships, and the need to maintain a certain level of receivables quality.
How does the advance rate affect financing?
The advance rate determines the percentage of the invoice value that a business can receive upfront, impacting the available cash flow.
What is the role of credit management in accounts receivable financing?
Effective credit management ensures that receivables remain high-quality, reducing the risk and improving the terms of financing.
What is the primary difference between recourse and non-recourse factoring?
Recourse factoring requires the business to buy back unpaid invoices, while non-recourse shifts the risk of non-payment to accounts receivable financing companies.
How can businesses benefit from invoice financing?
Invoice financing from a third party financing company provides immediate cash flow by using outstanding invoices as collateral, helping businesses manage operational costs and growth via these accounts receivable loans.
Why is factoring a popular choice for small to medium-sized businesses?
Invoice Factoring offers quick access to cash without requiring a strong credit history, making it an attractive option for businesses with limited financing alternatives for funding prior to customer invoice payments.
How does a company record payments?
When the customer makes a payment, it should be recorded in the accounting system by matching it to the correct invoice and updating the customer's account after collecting payments. Regular reconciliation is necessary to keep the accounts receivable balance accurate.
