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Fiction vs. Reality - Debunking Factoring & A/R Myths In Canada
Information on factoring and financing and receivable finance solutions in Canada. Debunking the misunderstanding around how it costs, how it works !
You have made the decision to consider factoring financing as an overall business financing strategy. In some cases you may be factoring and receivable financing currently, but are not happy with a number of key issues that weren’t discussed when you set up your facility. Let’s explore the three things you need to know around factoring financing in Canada, and debunk some of the myths and misinformation that is out there on this subject. These are:
All factoring Companies are the same
Factoring is expensive
Factoring is intrusive to my customers and suppliers, but my firm has to live with that
The reality in Canada is that as a country we came late to the factoring party. Factoring started in the U.S. and Europe, and has been established for hundreds of years. As a result the factoring that tends to dominate Canadian business financing, both in business model and pricing is heavily influenced by a small number of foreign firms.
We should probably do a very short ‘primer’ on factoring to ensure we’ve got the basics in place. Factoring, or receivable financing is the sale of your invoices or accounts receivable to a third party. It is very dominant in certain industries, i.e. trucking and transportation, staffing, etc, but quite frankly is now prevalent throughout Canada in many industries. What differentiates factoring is really the three points we’ll discuss – who is offering it to you, what it costs, and how does it work.
We recommend to clients that they deal with Canadian firms when considering a factoring option. Because this business financing is somewhat unique, and mis understood we strongly recommend you work with a trusted, credible, and experienced advisor in this area who can guide you through what many consider the factoring maze.
So let’s get back to our three key areas: First factoring firms vary in Canada by size, geography, and financial capability. You need to align yourself with a party that is most suited to your type of business, the size of your receivables portfolio, and the ability to deal on a one on one basis on any issues that come up .As we stated, it seems common sense that your best partner will be a Canadian firm who as direct representation in your geographical area.
Lets move on to point # 2 - Is factoring expensive? We always hate saying this, but the answer is that it depends. Receivable financing certainly has the aura of being expensive, and unfortunately most clients we meet are always focus on rate. A few key points need to be made, so let’s be clear on this issue. First of all factoring in Canada has a discount rate of between 1-3% per month. We use the term discount rate because the industry itself doesn’t view the rate as an interest rate; it views it as essentially a reduction in your overall gross margin. Let’s use a quick, clear example. Let’s say you have an invoice for $ 100,000.00. Factoring allows you to get approx 90% of the funds on that invoice the day you generate the invoice. (The balance, 10%, is paid to you when your customer pays,) and out of that holdback comes, say a 2% discount fee to the factor firm) the factor industry view that 2% as a commission for financing your invoice. If your customer pays in 30 days Canadian business can be forgiven by saying – I paid 2% per month, that’s 24% per annum that is expensive.
One of the main points we can make when advising clients on a proper factor financing facility is that the funds you get on immediate cash conversion can be used to purchase inventory at a better price for cash, or alternatively, you can take the many 2% net ten day discounts many suppliers offer . If that was the case on all your business we can make the statement that you are recovering 100% of your financing costs via this strategy, plus you have unlimited working capital .That’s financial power.
For our third and final point we address the issue of customer intrusiveness. We alluded the U.S. and U.K. firms who follow a very clear process on the receivable financing for your firm – they send your invoice to your customer on your behalf, they corresponded with the customer , and they call your customer for money .But , and this is a large ‘ but’ did you know that with proper negotiations and the use of a proper advisor you can negotiate and implement a facility that allows you to bill and collect your own receivables, while at the same time getting all the benefits of factoring – i.e. immediate working capital and cash flow?
In summary, factoring can be easily mis understood. Assess what you think is wrong or might not work with this method of financing, and develop a receivables financing strategy with the knowledge that you will not be making the mistakes of others who are less and ill informed.
South Sheridan Executive Centre
2910 South Sheridan Way
Suite 301
Oakville, Ontario
L6J 7J8
Office = 905 829 2653
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 .
' Canadian Business Financing With The Intelligent Use Of Experience '
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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