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The old cliché that the 'cheques is in the mail 'probably has never run more true for Canadian business owners and financial managers. Receivables, on balance, tend to be in most cases either the largest (or pretty close to it) liquid asset of the company, next to cash. And there is never enough cash.
As the economic challenges of 2008-2009 massively affected business credit liquidity all over the world, including here in Canada the other cliché of 'cash is king' became even more important. Many business owners we talk to continually say they are devoting too much time to collection of receivables and their working capital issues, rather than focusing on running and growing their business.
We should mention that as Canadian business owner's work on liquidating their receivables into that much needed cash that it is, many times, the larger corporations that are paying them as slowly as their smaller customers. Larger corporations by delaying payables can increase their own cash flow rations significantly, and the smaller customer or supplier, your firm, has little leverage with such large corporations. (We won't name any names to protect the innocent!)
Standard payment terms for most industries, more often than not, is 30 days, but it is of course not unusual for suppliers to stretch out to 60 and sometimes even 90 days.
So where does factoring come in. It certainly can be a consideration for Canadian business owners, as it alleviates the problems we have mentioned above - namely high investment in current assets of receivables and inventory, and prolonged delays of payment from even the largest customers.
The 'factor ' purchases the account receivable, withholds a fee for doing that, and advances cash immediately, almost the same day, against those invoices.
Factoring has been around over a hundred years or more, and has gained huge acceptance in Europe and the U.S. - It certainly never caught on in the past to the same degree in Canada as it has in other places. Some analysts estimate that in the U.S. it's a 100 Billion dollar business, and in Canada it's a 4 Billion dollar business.
So let's get back to our core theme - why is everyone talking about Factoring. Again, it's the instability of the financial markets and the difficulties that smaller and medium sized firms have in arranging 'adequate' business financing. We emphasize adequate because yes, it is great to get a line of credit at your bank of say $ 100,000 at current Canadian rates of 5 or 6 per cent per annum, but if you need 300,000.00 and all your collateral is tied up what good does that do - not a lot.
We believe factoring has done when primarily because of the tightening of chartered banks - Business owners go where the money goes, so alternative non traditional financing such as factoring will continue to do well when banks tighten credit facilities
As Canadian business optimism improves, but credit remarkets remain unstable to a certain degree factoring continues to be a solid viable solution. If your firm has assets such as receivables and in some cases inventory or purchase orders the Canadian business owner can obtain immediate cash for those assets. Most of these firms would not qualify for larger term oriented loans with various financial requirements such as other collateral, debt covenants, operating covenants, etc.
Depending on which type of factor facility the Canadian business owner chooses the facility can also reduce his collection and administrative work.
The best candidate for a factoring facility is a high growth firm with good gross margins. That profile is very important. Why is that? It's because factoring is more expensive than bank financing, so the firm gets all the cash it needs, but margins are eroded by a couple per cent age points. A low margin, commodity type business is not optimal for a factoring solution...
In Canada, as we have noted, factoring is still not widely accepted, in the U.S. it is dominated by a couple of huge players and probably a thousand smaller firms.
In summary, factoring continue to gain traction in the Canadian business financing marketplace. It is more expensive than bank financing, but provides a lot of liquidity that could otherwise not be found. Business owners need to thoroughly investigate this type of financing if they feel it's appropriate, or engage the services of a trusted financing advisor in this area with credibility and solid partner firms in this area.
Stan Prokop - founder of 7 Park Avenue Financial –
http://www.7parkavenuefinancial.com
7 Park Avenue Financial
South Sheridan Executive Centre
2910 South Sheridan Way
Suite 301
Oakville, Ontario
L6J 7J8
Office = 905 829 2653
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Stan has had a successful career with some of the world’s largest and most successful corporations.
Prior to founding 7 Park Avenue Financial in 2004 his employers over the last 25 years were, ASHLAND OIL, ( 1977-1980) DIGITAL EQUIPMENT CORPORATION, ( 1980-1990) ) CABLE & WIRELESS PLC,( 1991 -1993) ) AND HEWLETT PACKARD ( 1994-2004 ) He is an expert in Canadian Business Financing.
Stan has over 40 years of business and finance executive experience. He has been recognized as a credit/financial executive for three of the largest technology companies in the world; Hewlett-Packard, Digital Equipment and Cable & Wireless. Stan has had in depth, hands on experience in assessing and evaluating thousands of companies that are seeking financing and expansion. He has been instrumental in helping many companies progress through every phase of financing, mergers & acquisitions, sales and marketing and human resources. Stan has worked with startups and public corporations and has many times established the financial wherewithal of organizations before approving millions of dollars of financing facilities and instruments on behalf of his employers.
Stan Prokop
Article Source: http://EzineArticles.com/expert/Stan_Prokop/432698
Article Source: http://EzineArticles.com/3819920
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