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Business Account Receivable Factoring Solutions
7 Park Avenue Financial originates business financing solutions for Canadian Businesses – We offer Business Account Receivable Factoring solutions that solve the issue of cash flow and working capital – Save time and focus on profits and business opportunities
7 Park Avenue Financial: “Canadian Business Financing with the intelligent use of experience”
Nightmare On Receivable Financing Street? Sounds like an excellent name for a movie, right?
Well, maybe not, but Canadian business owners and financial managers seem to have one large struggle with the cost of receivable financing from Canadian business factors. Accounts receivable factoring companies play a crucial role in providing financial solutions by assessing the value of unpaid invoices. But when you understand how the cost of this finance vehicle works, factoring, aka ‘receivable finance’, suddenly becomes a lot clearer and more desirable. Let’s explain.
Secure Immediate Funds with Business Receivable Factoring
Business account receivable factoring is a business cash flow tool that transforms outstanding invoices into immediate cash, providing companies with the liquidity needed to fund day-to-day operations and drive growth.
This funding method allows companies to bridge cash flow gaps without taking on debt on their balance sheets, making it an excellent choice for businesses struggling with working capital challenges. By leveraging the value of receivables, businesses can unlock funds tied up in unpaid invoices, which provides financial stability and operational efficiency via asset turnover.
The process could not be more simple - invoices you submit to receive an 80-90% advance on those invoices.
The Role of A/R Finance
In A/R finance, it’s all about using your second most liquid asset, your receivables portfolio. (Cash is, of course, a bit more liquid!)
Understanding the True Cost
So, when you understand the true cost of the Canadian business finance method, you suddenly realize that you are immediately more productive from a working capital and cash flow point of view.
The Challenge of Uncollected A/R
When we step back, it’s somewhat immediately apparent that your uncollected A/R is only doing one thing on that left-hand side of your balance sheet. It’s unproductive, hasn’t allowed you to realize your profits, and, in effect, is costing you money. That’s a triple threat, for sure!
The Mystery of Receivable Financing Costs
So why is the cost of the receivable financing solution from Canadian business factors such a mystery or concern? It’s simply that the issue is either poorly presented or, more commonly, just plain misunderstood.
The Overlooked Carrying Costs
While the business owner or his finance person stares into the cost of A/R finance, he often forgets the carrying cost of his uncollected A/R portfolio. This can be analyzed and calculated in a number of ways, including the discounted cash flow model, but we don’t want to get too overly technical when, in fact, things can be explained a lot easier than that.
Traditional vs. Confidential A/R Finance
Suppose you are going with a traditional method of A/R finance in Canada (and by the way, that’s not our favourite or recommended one - we prefer ‘confidential receivable finance’). In that case, the other factors that affect your A/R costs are administration around your collections, the lost sales you are losing by having to carry your A/R instead, the financing costs you currently are absorbing, and, of course, the cost of a potential bad debt if the receivable is uncollected.
Benefits of Confidential Invoice Financing
As we noted, the best solution, in our opinion, for factoring in Canada is a confidential invoice financing facility whereby you bill and collect your receivables without any interference from your finance partner.
At the same time, you receive all the benefits of factoring, which include immediate cash flow advances on your A/R, allowing you to operate and grow. This facility, as well as the more traditional one offered by many, does take care of the time cost of your current A/R.
Simplicity of Receivable Finance
Receivable finance is a lot simpler than you think. You receive the cash from selling your A/R on an ongoing basis, giving you the ‘opportunity’ to reinvest cash more quickly into your business. In Canada, A/R financing ranges in the 1.5-2% area, assuming a 30-day collection period from your clients.
Calculating Current Costs
Depending on how you allocate your time, the administration, lost opportunity, and current financing costs, you might find that, after some careful analysis, your current costs are anywhere from 10% to 20% on a 2-3 month uncollected receivable.
KEY TAKEAWAYS
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Immediate Cash Flow: Factoring converts receivables into cash quickly, enhancing liquidity.
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Debt-Free Financing: Factoring does not increase liabilities as it’s not a loan - it's more similar to a line of credit
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Operational Efficiency: Immediate funds improve business operations and meet obligations.
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Reduced Credit Risk: Factoring companies often assume the risk of non-payment. With non-recourse factoring, the factoring company assumes the risk of customer non-payment, leading to higher costs and lower advance rates.
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Confidential Invoice Financing: This method allows businesses to manage their receivables privately and factoring fees are the same as traditional notification factoring
Conclusion
The bottom line today? Simple.
Understand the costs of your current A/R financing and investigate how you can turbocharge your cash flow via a receivable financing solution. It is crucial to understand how to calculate accounts receivable factoring, including determining eligible accounts receivable and calculating the advance rate.
Call 7 Park Avenue Financial, a trusted, credible, and experienced Canadian business financing advisor, for help with cash flow finance.
FAQ
How does business account receivable factoring work?
Business account receivable factoring services involve selling your unpaid invoices to a factoring company, providing you with immediate cash based on the invoice value in exchange for a factoring fee.
What are the benefits of receivable factoring?
Receivable factoring provides immediate cash flow, reduces credit risk, improves working capital, and allows businesses to focus on growth without incurring additional debt.
Is business account receivable factoring suitable for small businesses?
Yes, factoring accounts receivable is ideal for small businesses that need immediate cash flow to cover expenses, take on new projects, or manage seasonal revenue fluctuations.
How does confidential accounts receivable factoring work, and how does it differ from traditional factoring?
Confidential invoice financing, i.e. non notification factoring, allows businesses to manage and collect their receivables without the factoring company’s interference, maintaining the business’s customer relationship. Many factoring companies,but not all, offer non-notification funding.
What costs are associated with business receivable factoring?
Factoring costs typically include a percentage of the invoice value, ranging from 2% to 3% for a 30-day collection period. These costs can vary depending on the agreement and factoring company.
What should I look for in an accounts receivable factoring company?
When choosing an accounts receivable factoring company, consider its eligibility requirements, such as the minimum invoice amount and your customer's creditworthiness. Assess the factoring arrangement's payment terms and issues, including advance rates and fees. Additionally, look for specialized companies that offer tailored services for your industry and provide clear notification methods for invoice processing and how timely the factoring company pays.
How does factoring improve cash flow management?
Factoring provides immediate cash flow by converting receivables into cash, allowing businesses to manage expenses, invest in growth, and avoid cash flow gaps. Factoring receivables involves selling your receivables to a factoring company, which can offer different types of factoring, such as recourse and non-recourse factoring. Costs vary based on the type and terms of the agreement.
What industries benefit most from receivable factoring?
Industries with long payment cycles, such as manufacturing, transportation, and services, benefit significantly from receivable factoring due to improved cash flow and financial stability.
Can factoring help with credit management?
Yes, factoring companies often take on the credit risk associated with receivables, helping businesses manage their credit exposure and reduce the risk of bad debt.
What is the difference between invoice discounting and factoring?
Invoice discounting involves borrowing against receivables while maintaining control over the sales ledger, whereas factoring involves selling receivables to a factoring company that then manages the sales ledger.
How do I choose the right factoring company for my business?
Consider factors such as the company’s reputation, how accounts receivable factoring works day-to-day processing, accounts receivable factoring cost per the factoring agreement, the level of service provided via accounting software etc, and whether they offer confidential invoice financing.
How quickly can I receive funds from factoring?
The third party factoring company provides funds within 24 to 48 hours after the invoice is submitted and verified.
What is the impact of factoring on customer relationships?
Confidential factoring maintains customer relationships as the business continues to manage collections. Traditional factoring may involve the factoring company contacting customers for payments.
Can factoring be used for all types of receivables?
Factoring is typically used for business-to-business (B2B) receivables. Invoices from reliable, creditworthy customers are more likely to be accepted by factoring companies. With recourse factoring, the business retains the risk of customer non-payment, whereas with non-recourse factoring, the factoring company accepts all the risk.
How does receivable factoring help with cash flow issues?
Receivable factoring converts unpaid invoices into immediate cash, providing businesses with the funds to manage expenses and invest in growth. A cash advance represents a portion of the invoice value the factoring company provides, typically ranging from 75% to 100%.
What are the main advantages of business account receivable factoring?
The main benefits include improved cash flow, reduced credit risk, enhanced working capital, and the ability to focus on business growth without debt.
Can factoring improve my business’s financial stability?
Yes, factoring provides a steady cash flow, which helps maintain economic stability, manage expenses, and seize new business opportunities.
