Benefits Of Invoice Factoring And Factors That Affect The Cost Of Factoring Receivables

You know the drill - you have all the working capital you need already - unfortunately its tied up in receivables - so how can invoice factoring help your firm and what is the cost of factoring receivables , because from what you have heard its expensive .

Let’s address those issues around the following key points: Exactly what is factoring, what are the benefits for your firm, what does it cost, and how does it work. That’s a mouthful, but your understanding of these key issues could be the first step in your better understanding of one of the most popular methods of business financing today in Canada.

Factoring is the method by which you ’ sell ’ your receivables as soon as you issue them. Selling anything gets you ’ cash ’ and that’s the core premise of factoring.

Do you have to sell your receivables? Of course not - you can wait 30/60/90 days for your customers to pay you - but you’ve been there already and that’s not working! That brings us to the main benefit of factoring, which is working capital and cash flow in an almost unlimited fashion. How can we say unlimited cash flow - well, simply because if you have receivables you will always have immediate cash for them. Cash flow problems solved!

Part of the problem in our clients understanding the cost of factoring is that they view it always as an ’ interest rate ’. The factor firm does not view or call it that - it is a discount rate. They purchase your receivable (either on, some or all of your invoices) at a discount - That discount in Canada is anywhere from 1-3%. The norm tends to be closer to 2%.

Clients will always ask if their firm ’ qualifies’ for this type of financing. The reality is that if you have receivables you qualify, and this type of financing covers pretty well every industry in Canada. There seems to be a number of industries that are always using factoring - i.e. trucking/transportation, staffing, security guards, etc - but don’t be confused by that point - if you have a receivable, Canadian, U.S. or otherwise , it can be financed - or in our lingo ’ sold’ and ’ cash flowed’.

We mentioned the key benefit of a factor facility is cash flow - you can of course arrange more traditional financing via a bank, Canadian credit union, etc. However, that type of financing comes with stringent requirements, including solid financial performance, personal guarantees, other collateral, etc. You can typically qualify for a factor facility in a week or so - the process simply involving a basis application and the documentation to register the facility, in a similar manner that any bank would, i.e. a security agreement on your receivables, etc.

One other key benefit is facility size - at a bank type revolving line of credit you have of course a limit, and you can’t exceed that limit .That concept goes out the window with your receivable financing facility because your limit grows lock step with your sales and receivable investment. That’s true unlimited financing!

It always comes down to cost and the overall pricing of your facility will depend on several factors - the overall size of your receivable portfolio, its credit quality, how your customers have paid traditionally, etc.

We recently met with a customer who advised us that their total all in rate with a Canadian bank, including the rate and fees for all services, etc, was close to 11-12% when you factor everything in. Let’s say your factoring rate was 2% per month. And lets also say you now had unlimited cash to pay suppliers promptly, take prompt payment discounts, and negotiate better pricing. From our perspective there immediately isn’t that much more difference in factor pricing and bank pricing when you weigh in all the comparables.

Speak to a trusted , credible, and experienced business financing advisor who can assist you in determining the best factoring pricing for your firm , and allow you to focus on benefits that you can reap from this growing in popularity business financing in Canada .

--------------

Stan Prokop - founder of 7 Park Avenue Financial - http://www.7parkavenuefinancial.com
Originating business financing for Canadian companies , specializing in working capital, cash flow, asset based financing . In business 6 years - has completed in excess of 45 Million $$ of financing for Canadian corporations .Info re: Canadian business financing & contact details:
http://www.7parkavenuefinancial.com/invoice_factoring_cost_of_factoring_receivables.html