Discounting Invoice Factoring Financing in Canada

Invoice discounting, also known as factoring in Canada has significant advantages for Canadian firms seeking to improve cash flow and working capital generation.

This method of financing is essentially a form of asset based lines of credit – your firm is leveraging assets to maximize cash flow.

Factoring and invoice discounting firms are playing a larger role in the overall climate of business financing in 2010 – coming off very challenging years ( 2008-2009) as the global meltdown severely hampered small and medium sized firms ability to raise financing for operating capital needs .

Borrowing against accounts receivable is a very simply way of leverage assets, without taking on additional debt to your balance sheet, and converting a/r into cash – allowing your firm to reduce payable and invest in ongoing growth and profits .
Some clients continually ask us if there are negative aspects to factoring. The reality is that there is no one single perfect solution for any firm considering working capital financing – the reality is of course there are pros and cons to every method of financing your Canadian business. So the recommendation we provide is simply, ‘ caveat emptor ‘ – or to translate that Latin phrase into plain English - investigate invoice discounting and factoring and determine if the benefits of that type of financing can help you survive and prosper !

When you secure an invoice discounting or factoring facility you have new flexibility in a number of areas – you have additional cash for one thing, and ‘cash is king’ has never held so much importance as a business catch word .
Many Canadian firms have seized the day and taken the global financing challenge head on and in effect capitalized on this opportunity – they have acquired a competitor, merged with a synergistic partner, or in some cases engineered a management buyout. Factoring or invoice discounting can assist you in any of those strategies.

More often than not funds acquired through a factoring facility are simply used to reduce payable, or help to affect a business turnaround after a firm has had a very difficult year. In some cases traditional financing has been curtailed, and leverage of cash flow via factoring has emerged as the only option to business survival. In the direst cases factoring or a full asset based line of credit has helped many a firm in fact survive the bankruptcy or re organization process.

Invoice discounting works because it immediately frees up cash in your receivables – this helps to increase sales and allows your firm to invest in additional inventory – the cycle of course continue as this inventory is again converted into a receivable, generating further profits for your firm .

Many times smaller and medium sized firms cannot take advantage of the strategies that larger firms utilize to liquidate receivables – they don’t have the funds to invest in corporate credit and collection personnel, as well as sophisticated cash management and planning. So, by utilizing factoring and invoice discounting issues such as being ‘too small ‘, or ‘too new a firm ‘hold little relevance.

Many Canadian firms adapt formal U.S. or European methods of factoring – careful investigation, best achieved by working with a trusted and credible advisor, will allow you to find a facility that meets your long term needs. In a perfect world we recommend to clients that they seek a facility that provides maximum loan to value on receivables, can incorporate inventory as some additional component of financing, and, most importantly, allows you to bill and collect your own receivables.

Is factoring or invoice discounting the optimal solution for your firm? Weight the benefits, understand the costs and business processes, and determine if this form of Canadian Business Financing is right for your firm.

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