YOUR COMPANY IS LOOKING FOR RECEIVABLE FINANCING ALTERNATIVES!
ACCOUNTS RECEIVABLE CASH FLOW FACTORING FOR IMMEDIATE CASH
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Financing & Cash flow are the biggest issues facing business today
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Oakville, Ontario
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It's not only a great legitimate question... it's a great question. Does selling receivables via AR Finance factoring a solid way to generate cash flow and growth for Canadian business. We're all for painting a balanced view of this common question so let's examine some key facts around accounts receivable financing.
WHAT IS THE ACCOUNTS RECEIVABLE FINANCING VIA SELLING RECEIVABLES
Factoring in Canada is not borrowing - it's selling. So just that simple concept is critical to understanding how A/R financing differs from traditional bank commercial credit lines. It's fundamental to understand the paperwork and legal concepts behind this process - and quite frankly it’s not that difficult. Let's use a $ 10,000 invoice as an example. If your terms are 30 days and your client actually pays you in that timeframe (some don’t by the way!) then here's how the process works.
CASH FLOWING THE INVOICE / ACCOUNTS RECEIVABLE FACTORING
No loan is in place here. You sell that 10k invoice at a discount, which is typically, using our example at a discount of 150-200$. You are in a position to receive those funds, if you choose, immediately upon issuance of your invoice to the client. In effect, you have transferred the ownership and the rights of that ownership in your sale to your factor firm.
TWO KEY POINTS ON FACTORING ACCOUNTS RECEIVABLE FINANCING
Here is where some additional clarification is required. Two key points come to mind. One is that the majority of factor firms in Canada (let’s say 99 %!) typically take over the collection process. After all they have purchased your accounts and given you funds, right?
Not so fast mister! An even better solution at this point is to utilize a confidential receivable financing facility. Under this program, you still are 100% in charge of collecting your accounts and maintaining the client relationship. And you still have received the benefits of that instant cash flow. Talk about the proverbial double whammy!
Are there any guarantees in life and business? We can think of one, which is that the debate on the cost of selling receivables under an AR Finance program will probably never end! We can though strive to provide some clarity around the issue, which is simply that you need to have a handle on three aspects of invoice factoring.
3 KEY POINTS ON FINANCING VIA FACTORING COMPANIES
What are those three key underpinnings then when it comes to how a factoring company works? They are as follows:
1.The holdback that is imposed by the factoring firm
2.The actual discount percentage (clients mistakenly refer to this as ' the rate ')
3.The advance amount under your borrowing facility
FACTORING ACCOUNTS RECEIVABLE - THE TIME FACTOR ON COST
You will also recall that when we used our 10k example we made the assumption that your clients will pay in 30 days. As we joked, no really we were joking... many firms don't pay in your stated terms. How then does the A/R financing industry handle this? Well, if you're dealing with the right firm your costs will be then calculated on a per diem basis so that if your clients pay in 47 days you will only be charged a fee that reflects those additional 17 days. The cost of this method of accounts receivable financing is expressed as a fee, not an interest rate, so this is an often misunderstood point in accounts receivable factoring.
Why then to experts maintain that the cost of factoring is in fact not as expensive as perceived. It comes down to some basic reasons:
IS FACTORING EXPENSIVE? YOU DECIDE
Your cash flow accelerates immediately
By turning over more sales and assets with those new funds you generate more profits - You are no longer ' the bank' for your own clients, as you never intended to be! What we are really talking about is a trade-off between more financing costs than the bank but the ability to earn profits on more sales and asset turnover. Oh, and by the way, some firms seem never to be able to be in a position to get approved for bank financing - but there will always be an A/R solution to their working capital problems around their investments in accounts receivable.
One quicker example. Let's say your company determines it needs 250k of extra working capital. You could, if your firm is bankable, approach your bank for a 250k working capital cash flow term loan. The typical term might be 3-5 years. You might well find that these costs are much higher than a factoring facility which is all about asset turnover.
CONCLUSION
Today’s key point around this small business finance solution? Simply that keeping an open mind to selling accounts receivable as a cash flow strategy might just be the most viable finance structure you have looked into for small businesses in Canada! Seek out and speak to a trusted, credible and experienced Canadian business financing advisor who can assist you with your A/R financing needs.
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Stan Prokop
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