How Factoring and Accounts Receivable Funding Can Fix your Working Captital problems

When your payments from key customers are significantly slowing down many firms in Canada turn to accounts receivable financing, otherwise known as ‘factoring’ for a solution to their working capital challenges. As unbelievable as it seems in many cases it is not unusual to have clients tell us that receivables are getting paid in 90 days these days, sometimes longer in fact. Gone seem the days when the 30 day term on your invoice seems acknowledged and honored.

When those payments do slow down that tends to cripple your cash flow. Naturally the solution to the problem, or the obvious one to most business owners is to make an all our effort to improve collections but focusing on increased accounts receivable turnover.

As an aside we think it’s very important that Canadian business owners and financial mangers know their accounts receivable collection period – you don’t have to be an analyst to do that - the simple formula is as follows –

A/R Times 365 Divided by Sales

To illustrate, if your firms year end balance sheet has receivables of 400k and your annual sales are three million dollars your collection period is 48 days. (We wish our collection period was 48 days we can hear you saying!)
Naturally you can alter the above formula on a quarterly or monthly basis by adjusting the A/R and sales level for your required period.

You can address the additional cost in carrying receivables by attempting to raise your prices with your customer to cover those increased A/R cost. However, that gets you profit, and not liquidity. That is where factoring and receivable financing comes in.
Factoring is quickly becoming the first alternative solution for firms who wish to get 85-90% of their cash immediately after they invoice. This solution is available through a pure factoring solution, or, if your firm is a bit larger ( 250k + in receivables) as part of a working capital facility or asset based lending facility.

The challenge, we tell clients, is ensuring you have the type of facility and factoring partner that meets your overall goals in day to day business financing. It certainly also helps when you have a solid business with good clients, but the hard reality is that factoring is available to almost every size and type of business is Canada – what will differentiate your facility is simply the overall pricing, terms, and structure of your facility .

Is your firm a candidate for a factoring or accounts receivable financing facility. It probably is if your customer payments are slowing down, sales are growing, and you are unable to obtain traditional bank lines of credit from Chartered banks. Factoring is hugely popular in the U.S. - Over 140 Billion dollars (yes that’s billion!) was done in 2009. The Canadian landscape is much smaller and fragmented, but bottom line, its growing.

We can’t over emphasize to clients that your factoring facility grows with your business, and your factoring credit facility can be adjusted upward very easily in terms of your growth.

Is there any downside at all to a factoring and working capital facility? When we sit down with clients and work them through the process we focus on 3 main areas –

1. Choosing the right factoring and receivable financing partner

2. Ensuring you understand your true costs ( and how to offset them )

3. Picking the right facility from a day to day ease of doing business perspective

Speak to a trusted, credible and experienced advisor in this area to ensure that you are comfortable that such a business financing is the solution to your cash flow and working capital problems.

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