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OVERVIEW – Information on the actual costs of business factoring in Canada and how ar finance factor cost should be assessed in terms of opportunity costs and financing charges
Business factoring in Canada. It's A/R Financing. You can't handle the truth!
We think you will be able to once we review the basics around business factoring in Canada, what is the true factor cost of AR finance (ar = accounts receivable). Let's dig in.
Your firms ability get financing around the most liquid and accessible business asset you have, your receivables, is what can make or break many small and medium sized businesses .
The big corporations seems to have this down quite well already , as they have large sophisticated infrastructures for credit and collections, as well as access to corporate borrowing and securitization facilities that smaller companies just don't have . By the way, we can make a strong case that the big guys use factoring, but they call it securitization!
So what's the true cost - (it's not what you think it is!) and, even as critical - picking your partner in this method of Canadian business financing.
Is your firm eligible for a business factor facility? If you can answer yes to one single question - ' Do you have accounts receivable?' then, you guessed it, you're eligible!
In many cases if you are working with the right firm you can blend in receivable and purchase order financing into the same facility - the names tend to change then, as we refer to that as asset based lines of credit and working capital facilities.
So, it's always about cost, right? We don't think so, but our client's sure do, so let's invest some time to discuss the real factor cost of ar financing in Canada. Part of the problem in addressing the cost issue is the perception by clients, totally understood of course, that factoring costs are viewed as interest rates by the borrowers.
That's not how the industry views it; they are buying something you are selling, at a discount. That discount rate is often (99% of the time!) interpreted as an annual interest rate. So while the factor firm buys your receivables at a rate of between 1-2% (on a monthly basis) our clients gasp and view that as 12 - 36% annual percentage rates.
So, how do you assess the factor cost then? Here are the elements you should consider in assessing business factoring in Canada. First of all, if you don't have some decent gross margins on your products or services then even bank financing or carrying your own receivables is expensive. So a solid gross margin is important.
To calculate your margins of course simply take your gross income and divide that number by your sales revenue and express it as a percentage. The number of course shows you how much you are making considering the costs you incur in actually producing that product. Naturally service companies have usually great margins, because there is no direct cost of sales.
Other issues to consider in understanding the true cost of factoring is how long it takes to collect your receivables, as well as the actual cost it is taking you to carry that investment . And don't forget the concept of lost opportunity - you can take you factoring cash and turn that into additional sales and profits, as opposed to waiting for a cheque to come in 60- 90 days later.
Our final point is that the cost of factoring can be significantly offset by your ability to take discounts and purchase in a smarter fashion, in quantity, etc.
In summary, the true factor cost of AR finance is probably not what you think it is. Thousands of firms that use and offer this service can't be wrong.
Speak to a trusted, credible and experienced Canadian business financing advisor for assistance in understand the real cost of business factoring in Canada. You might just be surprised, and find you can handle the truth!
7 Park Avenue Financial :
South Sheridan Executive Centre
2910 South Sheridan Way
Suite 301
Oakville, Ontario
L6J 7J8
Business financing for Canadian Firms , specializing in working capital, cash flow, asset based financing , Equipment Leasing , franchise finance and Cdn. Tax Credit Finance . Founded 2004 - Completed in excess of 100 Million $ of financing for Canadian corporations .
7 Park Avenue Financial
Office = 905 829 2653
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
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