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ACCOUNTS RECEIVABLE FACTORING SOLUTIONS IN CANADA
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A lot of receivable finance in Canada happens via financial factoring. For those business owners and financial managers that aren't fully familiar with this method of Canadian business financing, there is that potential element of fear of the unknown. We think some basics and some recommendations are in order, allowing you to get back on top of business financing challenges. Let's dig in.
ACCOUNTS RECEIVABLE FINANCING IS AT THE FOREFRONT OF ALTERNATIVE LENDING IN CANADA
A worldwide revolution is, in fact, in place on alternative financing methods such as A/R finance - a subset of asset-based lending. The real surprise is that companies of all sizes, from the start-up to major corporation, in fact, utilize this method of cash flow/working capital financing.
WHAT IS FACTORING?
Factoring is very ' formulaic ' and is a financial solution linked to your accounts receivable's total value. Factors such as income statement, debt to equity, and personal collateral have very little to do with approval for this finance method, which is, of course, one of the reasons for its popularity. In effect, your A/R always covers your ' loan ' amount, although the loan is a misnomer as it’s actually a ' cash flow monetization' of your 2nd most liquid asset - Receivables. (Cash is still king at # 1!).
WHY IS FACTORING SO POPULAR
The broad appeal of financial factoring solutions revolves around the fact that cash is immediate on making a sale if you choose that to be the case. Typical advances are 90%range, and that adds another layer of attractiveness given banks (if you qualify) tend to margin receivables at 75%. Bottom line - more liquidity.
FACTORING IS A NON BANK ALTERNATIVE FINANCING SOLUTION
Firms that might be deemed ' higher risk ' by Canadian chartered banks can still almost always secure separate non-bank receivable finance solutions.
BANK FINANCING VERUS FACTORING
From the Canadian bank's point of view, a customer's overall creditworthiness drives lending solutions. These are lower costs almost always, as financial factoring is a more expensive form of financing, but accessible! The bank, in fact, views receivables and others as ' secondary ' sources of collateral - A/R finance views it as the only source of collateral, therein the difference.
HERE'S ONE WAY TO GET COMFORTABLE WITH FACTORING
Many Canadian firms are uncomfortable with the traditional form of factoring, which almost always involves notifying your clients' process and payment. Therefore our recommended solution is CONFIDENTIAL RECEIVABLE FINANCING - here, the business bills and collects its own receivables - it’s only your firm that knows how you are financing yourself—a classic MIND YOUR OWN BUSINESS that allows companies to keep their financing solutions private.
Non recourse factoring is also available, allowing you to transfer any bad debt/credit risk you would normally be carrying under recourse factoring.
Factoring fees for small business vary but are expressed as a ' fee ' ( factoring discount ) instead of an interest rate and are typically in the 1-2% range - this financing may be your quick access to cash on an ongoing basis as your company sells its product or services generate sales revenues. It's the ultimate in short term funding for day-to-day operating activities. The faster your client will pay the invoice, the less financing cost. These days, it certainly is not unusual for some clients to pay in 60-90 days, notwithstanding your 30-day terms.
A/R FINANCING CAN BE PART OF A FINANCING COMPANY ASSET BASED LINE OF CREDIT
Businesses that want to source more capital can consider a non-bank asset-based lending solution instead of just receivable factoring, allowing them to combine inventory and equipment, plus A/R into one total business line of credit. As opposed to individuation a/r financing from factoring companies, an ABL credit line combines the funding of receivables, inventory, fixed assets, and yes, even real estate into one borrowing facility for your business needs!
Factoring receivables is one of the best ways to finance the balance sheet when your firm can't access bank credit and is not a business loan that puts debt on your balance sheet.
CONCLUSION - FACTORING OF ACCOUNTS RECEIVABLE
Invoice factoring for receivable financing accounts via a factoring company is a valuable working capital tool and growing in popularity every day for small businesses looking for funding solutions. If you want to overcome the fear of assessing new cash flow financing solutions and want to know more about financing accounts receivable for your company, seek out and speak to 7 Park Avenue Financial, a trusted, credible and experienced Canadian business financing advisor who can assist you with your financing needs.
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Stan Prokop
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