How Well Is Your A/R Financing Really Working?
Information on factoring and receivable financing in Canada - What it costs.. why it works
Factoring in Canada is four things:
New and increasingly accepted
Misunderstood
Different than in the U.S.
Growing more popular every day as an alternative vehicle to business financing
So why is there so much mis information about factoring and how can business owners in Canada get the ‘real story ‘. Part of the problem is that factoring, in our opinion, means different things to different people, both within the industry itself, and also to the Canadian business owners. Similar to the terms ‘ cash flow ‘ and ‘working capital ‘ the use of the term is interchanged in a variety of ways . Also, factoring isn’t a home grown solution, and migrated to Canada from the U.S. and Europe, where it has been in place for hundreds of years.
Factoring, also know as receivables financing , or ‘ invoice discounting ‘ is best utilized when firms are growing rapidly, have sales and verifiable invoices, and require injections of working capital for that a/r investment that otherwise might not be available through traditional sources such as the bank . In 99% of cases that we deal with where a client is a ‘ start up ‘ the initial financing through a factoring facility is a critical and valuable tool in the early growth of the company .
Let’s get back to the confusion around factoring. Traditional factoring in Canada is in fact simply the sale of your receivables, and their purchase to a factor firm. The most immediate benefit is the immediate receipt of cash, which eliminates the need to wait for anywhere between 30-90 days for payment from your customer. Over the years it is inherently obvious that every firm out there recognizes that delaying payments to your suppliers is an instant form of cash flow. However, when you are on the receiving end of that, waiting for your money, that is poor consolation!
Does your business receive 100% of the invoice value when you sell your invoices either individually, or bundled in a larger amount of invoices? The answer is ‘no’ – You generally receive on the same day anywhere form 75-90% of the invoice value. The balance is held back as a hold back or buffer, and paid to your firm immediately on final receipt of payment from your customer. At that point factoring would be ‘free ‘, but it isn’t, there is a further deduction for the commission or financing cost by your factor firm. That cost is one of the greatest issues facing Canadian business owners, because it is anywhere in range from 9%/annum to 2-3% / month.
The costs associated with factoring in Canada have to be viewed in the context that although they are higher than traditional bank financing that point becomes moot because your firm probably cannot qualify at this point for a true Canadian chartered bank operating facility. So factoring simply allows you to grow your firm when you can’t obtain sufficient financing otherwise.
So now we have understood what factoring is, and why it has become a tool within the Canadian business financing tool kit. That’s the easy part. The challenge for Canadian business then becomes –
What type of firm is the best one for my company and industry
How does this financing work on a daily basis
Am I comfortable enough to let the factor firm notify my customers regarding invoice verification and payment
Is there an alternative to involving my suppliers and customers into this financing process
We advise clients that the best factoring facility in Canada is one in which your firm can bill and collect its own receivables. That type of facility is called non notification and is as close to traditional financing mechanics as one can get.
So whats our bottom lien summary – it’s simply as follows. Factoring in Canada is only mis understood because business owners don’t have access to solid unbiased information on how it works, what it costs, and how it benchmarks as an alternative to traditional financing. Certain factoring facilities in Canada exist that are very transparent to your firm and its customers. Factoring has higher costs, but those costs can grow your sales and profits considerably. Seek out the advice of a trusted, credible and experience advisor in this somewhat misunderstood area of Canadian business financing.
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 .
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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