AR Finance: Revolutionizing Business Cash Flow Management| 7 Park Avenue Financial

AR Finance: Accounts Receivable Financing - Canada    

 

 

We rarely meet a client who is comfortable enough to say they are a ‘ Master ‘ of AR financing pricing when it comes to receivables financing and factor rates vis a vis overall rate structure in Canada.

 

Let’s see if we can help you achieve some ‘ Master ‘ status in Canada's often-confusing (but shouldn’t be) area of business financing.

 

A factoring rates comparison can be challenging for those not familiar with the terminology of the accounts receivable (AR) finance industry, so let’s get started.

 

 

So what does it mean to factor in receivables, and what is the cost involved - At 7 Park Avenue Financial, that’s a common question we get from new clients.

 

The answer is that factoring receivables has become the go-to strategy for small and medium-sized businesses that struggle with the working capital and cash flow solutions they require to fund their businesses.

 

Through a method of ‘purchasing a/r’ instead of taking an ‘assignment of your a/r’ similar to a bank, your business can become a cash flow machine based on your revenue generation.

 

Business experts use the term ‘pledging accounts receivable’ via bank financing, while factoring is the collection of your receivables via yourself or a factoring company.

 

 

  

  

THE BOOKKEEPING AND ACCOUNTING AROUND THE FACTORING TRANSACTION    

 

 

So why is there a combination of mystery and clarity around using just your accounts receivable for cash flow and working capital financing?

 

It’s key to remember that when you look at this type of financing, it’s essential to understand what is happening, which we shall say is ‘ beneath the transaction’.

 

Factoring/receivable financing in Canada is essentially the sale of your receivable, and that’s how it must be recorded in your bookkeeping and accounting.

In accounts receivable financing, the business is responsible for collecting payment from the customer, and the funds are released once the customer pays their invoice.

 

Let’s quickly get some of that ‘ boring’ accounting out of the way. The entry is pretty basic - it’s a ‘ CREDIT ‘ to your accounts receivable and a DEBIT (an increase in your cash, by the way) to your cash account. Mission accomplished!

 

  

THE COST OF FACTORING FINANCE IS NOT AN INTEREST RATE - IT IS A DISCOUNT FEE  

 

 

Since your factor company/financing partner charges a discount fee for purchasing your receivables, either once or on an ongoing basis, you also have to account for the financing charge, so that’s an additional entry as a DEBIT to your interest account.

 

Factoring rates are expressed as a ‘discount’ calculated based on the invoice value. This is why factoring costs are often misunderstood by borrowers, especially when companies are unable to achieve standard' 30 days’ terms.

 

 

We promise this is the last entry, but when complete, you will have understood the actual mechanics of AR finance pricing.

 

That entry involves the ‘holdback’ since, typically, you receive only 90% of your invoices as cash as you generate them. The 10% is a holdback; - you receive that when your client pays, so you must set up one final entry as ‘DUE FROM FINANCE FIRM’.

 

The 90% is the advance rate, meaning that your firm was advanced 90 percent of the total invoice.

 

 

WHAT IS THE BEST FACTORING COMPANY OFFERING

IT'S  ' CONFIDENTIAL ' !

 

 

If we had to be honest in the world of factoring companies (that’s always our preference!), we would have to say that our favourite/ recommended method of financing receivables is a Confidential Receivable Financing arrangement.

 

That is, one in which your firm bills and collects your receivables—i.e., how you finance your business is your own business!

 

Receivable financing companies are crucial in providing confidential financing solutions and managing cash flow efficiently by offering quick funding based on outstanding invoices.

 

 

4 KEY BENEFITS OF RECEIVABLE FINANCE

 

 

That type of arrangement via a factoring company still allows you to receive all the benefits of receivables finance:

 

 

Immediate cash on your sales generations

Balance sheet strength

Ability to take supplier discounts and achieve better vendor pricing

Factoring is not consider loan/debt financing - no debt goes on your balance sheet - you are simply monetizing assets, namely receivables

Etc!

 

 

Those benefits help you offset the cost of the factoring rate, sometimes in its entirety.

 

 

  

KEY TAKEAWAYS  

 

 

• Invoice factoring: Converting unpaid invoices into immediate cash by selling them to a third-party finance company

• Working capital improvement: Utilizing AR Finance to boost available funds for day-to-day operations and growth initiatives

• Cash flow forecasting: Predicting future cash inflows and outflows to make informed financial decisions

• Credit risk mitigation: Transferring the risk of non-payment to the finance provider, reducing exposure to bad debts

• Financing costs: Understanding the fees and interest rates associated with AR Finance to evaluate its cost-effectiveness

• Accounts receivable loan: Borrowing against unpaid invoices to access immediate capital without selling off the invoices

 

  

CONCLUSION  

 

 

Business owners and financial managers are looking for fast and flexible factoring solutions, but they also want to understand the cost of factoring as well as the benefits and potential disadvantages -

 

Call  7 Park Avenue Financial, a trusted, credible, experienced Canadian business financing advisor who can help simplify Canadian receivable financing.

 

Receivable loans offer quick access to capital and improved cash flow management, making them an advantageous option for businesses needing immediate liquidity based on outstanding invoices.

 

  

FAQ  

 

 

How does AR Finance improve cash flow management?

AR Finance converts unpaid invoices into immediate cash, providing businesses with a steady stream of working capital to meet operational needs and seize growth opportunities.

 

 

What advantages does AR Finance offer over traditional loans?

Unlike traditional loans, AR Finance doesn’t create new debt, offers faster funding, and scales with your business growth. It also transfers the risk of non-payment to the finance provider.

 

 

Can AR Finance help my business during seasonal fluctuations?

Yes, AR Finance provides flexible funding that adapts to your business cycles, ensuring you have access to working capital during both peak seasons and slower periods.

 

 

How quickly can I access funds through AR Finance?

With AR Finance, you can access funds within 24-48 hours of invoice approval, providing rapid liquidity when needed.

 

 

Will AR Finance affect my customer relationships?

AR Finance can be structured discreetly, allowing you to maintain direct relationships with your customers while benefiting from improved cash flow and reduced credit risk.

 

 

What types of businesses are best suited for AR Finance?

 

AR Finance is ideal for B2B companies with creditworthy customers, long payment terms, and a need for consistent cash flow to support operations and growth.

 

 

Is there a minimum invoice amount required for AR Finance?

Minimum invoice amounts vary by provider, but many AR Finance companies work with businesses of all sizes, offering solutions tailored to your specific needs.

 

 

How does AR Finance differ from invoice factoring?

AR Finance is a broader term encompassing various receivables financing forms, including invoice factoring. Factoring typically involves selling invoices, while AR Finance may include other structures like asset-based lending.

 

 

Can I choose which invoices to finance through AR Finance?

Many AR Finance solutions offer flexibility in selecting which invoices to finance, allowing you to optimize your cash flow strategy based on your needs and customer relationships. Terms are specified in your accounts receivable financing agreement.

 

 

What documentation is typically required to set up an AR Finance arrangement?

Typical requirements include financial statements, aging reports, customer information, and copies of invoices. The specific documentation may vary depending on the finance provider and the scale of the arrangement.

 

 

What factors should I consider when evaluating ACCOUNTS RECEIVABLE FINANCING COMPANIES?

When choosing an AR Finance provider, consider their fees, advance rates, funding speed, industry expertise, technology integration capabilities, and customer service level for your accounts receivable balances.

 

 

How does AR Finance impact my company’s balance sheet?

AR Finance can improve your balance sheet by converting accounts receivable into cash, potentially reducing your days sales outstanding (DSO) and enhancing your overall financial position.

 

 

Can AR Finance be combined with other financing options?

Yes,  financing accounts receivable can often be used in conjunction with other financing methods, such as term loans or lines of credit, to create a comprehensive funding strategy tailored to your business needs and your accounts receivable balance that requires funding.