Is Selling Receivables Via AR Finance Factoring A Viable Cash Flow Solution?

Assessing Viability of Canadian Receivable Finance Strategies


OVERVIEW – Information on selling receivables as a cash flow financing strategy in Canada . Why AR finance, aka ‘ factoring ‘ offers a viable business capital solution for Canadian business owners and managers.


It's not only a great legitimate question... it's a great question. Is 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.

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 you client actually pays you in that time frame (some don’t by the way!) then here's how the process works.

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.

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.

What are those three key underpinnings then? They are as follows:

The holdback that is imposed by the factor firm

The actual discount percentage (clients mistakenly refer to this as ' the rate ')

The advance amount under your borrowing facility

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 you clients pay in 47 days you will only be charged a fee that reflects those additional 17 days.

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:

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.

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. 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.

Today’s key point? Simply that keeping an open mind to selling receivables as a cash flow strategy might just be the most viable finance structure you have looked into! Seek out and speak to a trusted, credible and experienced Canadian business financing advisor who can assist you with your A/R financing needs.

7 PARK AVENUE FINANCIAL
CANADIAN CASH FLOW FINANCING EXPERTISE



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 10 years - has completed in excess of 80 Million $$ of financing for Canadian corporations . Core competancies include receivables financing, asset based lending, working capital, equipment finance, franchise finance and tax credit financing.
Info re: Canadian business financing & contact details :

http://www.7parkavenuefinancial.com/selling-receivables-ar-finance-factoring.html



7 Park Avenue Financial
South Sheridan Executive Centre
2910 South Sheridan Way
Suite 301
Oakville, Ontario
L6J 7J8
Phone = 905 829 2653
Fax = 905 829 2653

Email = sprokop@7parkavenuefinancial.com








Stan Prokop