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Receivable financing solutions in Canada, often called ' business factoring ', offer a true ' second chance ' when it comes to the business owner/financial mgr’s ability to turn adversity into opportunity. This business finance solution goes by a few names: invoice factoring, invoice discounting, receivable factoring, etc. There are different forms of factoring, so we forgive new clients at 7 Park Avenue Financial for sometimes getting overwhelmed with the terms!
The ability of your company to turn cash flow for business challenges into a major win in working capital and cash flow might just come from one of Canada's newer forms of business financing, called ' business factoring '. Spoiler alert - Accounts Receivable factoring it's not that new!
Getting the order, and then getting paid. The old ' cliché' of ' the order is not complete until it's paid for '... as trite as that sounds, seems to hold true even today, especially for new, small and medium size firms.
Many clients we meet with are in the enviable position of getting larger orders and contracts than they might have imagined based on their innovative products and services. But with that success, as we noted, comes the challenges of cash flow financing.
During the past few years with all the economic turmoil it seems Canadian business financing options seem either limited or have disappeared - that's certainly how many clients feel. The impact of accounts receivable growth is a huge challenge, not to mention inventory and Purchase Order / Contract funding needs.
Many companies find that traditional bank financing is restrictive to a point that Canadian banks can't meet their business credit needs. The concept of ' seeling a/r ' to a third party and generating immediate cash as you grow sales has become popular with thousands of companies in Canada. This differs from assigning accounts receivable to a bank.
Note that almost all of the commercial factoring in Canada is done by non bank commercial lenders. Canadian banks will often refer customers seeing a/r financing to a specialty lender or an experienced advisor familiar with factoring.
Advantages of Factoring Vs. Other Types Of Financing
There are of course some significant differences between a/r finance and the concept of a ' commercial loan '. Primary is the fact that this type of business credit is not a ' loan' per se - your company does not take on debt on your balance sheet. The amount of factoring financing is simply directly related to the amount of your A/R. Canadian borrowers will be happy to know that there is virtually no upper limit to the amount of factoring finance if your firm is growing and has good receivables, domestically or internationally.
Borrowers know only too well that bank financing is tied to credit limits, annual reviews, and a variety of covenants, personal guarantee focus, and the potential requirement of outside collateral. Many Canadian firms feel the pressure to increase outside equity, and a good receivable financing facility will allow you to potentially avoid that need.
What Type Of Company Utilizes Accounts Receivable Financing?
Almost every industry in Canada uses Factor financing. Industries in the oil and gas sector, staff placement, manufacturing, distribution, wholesaling, trucking, technology and business services all are major clients of the receivable financing industry.
Although some businesses that are financially challenged in some manner, the proverbial ' bad credit ' industry statistics show that the factoring industry is experienced strong growth and popularity.
Business cash flow, a la ' cash is king ' has never been more relevant for the economy. Receivable financing allows firms to not be victimized by clients pay 30, 60 or dare we say it 90 days beyond stated payment terms. It's the SME sector that feels that pain the most, as larger corporations have access to more liquidity.
Business factoring can be called a subset of asset based financing - the monetizing of assets without taking on commercial business loans and term debt. The speed at which factoring facilities can be arranged is also an appeal to Canadian business owners and their financial managers. The concept of no installment payments has broad appeal to factoring clients.
Key Points in Determining the Financing Value Of Your Accounts Receivable
Numerous factors are taken into account when commercial lenders are setting up your accounts receivable financing facility. It's all about the true value and quality of your a/r. When it comes to your accounts receivable ageing it's no secret newer invoices have greater value - numerous industry statistics validate that point. Who your client is also is important. An extreme example has been given that a receivable owing to your firm from Google has more value than one owing from a local DVD rental store!
As a commercial borrower in a factoring facility the more info you have on your a/r base will result in a more cost effective facility.
What Do Factoring Companies In Canada Require To Set Up Your Invoice Purchasing Facility
As a general rule borrowers will be pleased to know that the entire application process in setting up your facility is very simple and straight forward. Key information required includes :
- Standard credit application
- Agings for a/r and a/p
- Confirmation of legal company name - ie articles of incorporation
- Sample invoice
It should be noted that there is no requirement to finance all your a/r base, although many of our clients choose that route, allowing the facility to mirror a true bank line of credit.
So we have waxed eloquent on the problem- That's easy. You'd prefer a solution though! Receivable financing, also known as factoring addresses the issues of your customers paying you in 30.60, or dare we say it, 90 days. You can carry those receivables and continue to make a high investment in current assets, or you can turn your sales into immediate cash.
Let's cover off some other basics around how this innovative method of business financing works. When you sold the product or service you hopefully had enough gross margins in your cost of sales to make the sale profitable. If you are able to sustain another 1- 2% of gross margin erosion you can use receivable financing to turn sales into same day cash, which is what this financing is about. That is known as the factoring discount, which is a cost, and not an interest rate as some people believe.
So how does this all work? We're glad you asked! Let's reveal and recap in a manner that's understandable. Your purchase orders or contracts must be ' clean ' from a viewpoint of being able to demonstrate you can recognize revenue on your shipment. We should interject at this point that the banks will finance your receivables also, but that comes with much stricter criteria and limits on the amount you can finance.
That is why factoring has risen in popularity, it provides unlimited... yes... unlimited same day cash flow for your sales. Your challenge is to work with a trusted, experienced and credible business financing advisor who can steer you to the right partner with the type of facility that works for you.
Although traditional factoring along the lines of the U.S. model requires your customer to be notified we are in fact a fan of the type of facility that allows you to bill and collect your own receivables, for all the obvious reasons. At 7 Park Avenue Financial we've called that Confidential Receivable Financing.
It's important for clients to understand at its most basic how factoring works. You are advanced, on the same day as you invoice approx 90% of funds for your invoice. The remaining 10% is a holdback which creates a reserve and also covers the financing charges. When your customer pays you or the factor you receive the remaining 10% of your invoice amount, less the financing charge.
In Canada the cost of factoring from accounts receivable factors ranges from 1-2% a month. The cost of factoring revolves around some key points. They include:
Industry specific issues relating to your company - some industries are occasionally ' out of favour"
Size of your Receivable base - a very general rule is that many facilities start in the 250k range, there is no upper limit, but any size of facility small or large can ultimately be financed with the expertise of a business financing consultant
General level of creditworthiness of your client base as it relates to any major concentrations or invoice size, geographical location, etc
DSO! Business people need to be familiar with the concept of DSO - ' days sales outstanding ' It is a key measure of any successful company. The largest and most successful corporations in the world have this a key measure of financial and profit performance. DSO is measured in days, lower is better and the turnover of your a/r can dramatically affect the cost of factoring.
Note that it is also possible to transfer all of the risk of bad debt to your funder, which is known as non-recourse factoring - these facilities naturally cost a bit more and are sometimes abetted by credit insurance. Factoring companies in Canada and advisors can provide your firm with more info on this additional investment in credit risk.
It turns adversity into opportunity because you grow sales with larger gross and net margins, and if you utilize the financing properly you are actually in a position to reduce much, in some cases all of your financing costs by taking discounts with your own suppliers or buying smarter and in larger quantities. Reversing the cash flow for a business problem - That’s a win win in the language of business.
In summary, it is important to realize how factoring works and why it can be valuable to your business, in good times and in less than good times! Your firm accelerates cash flow and literally unties the capital you have invested in sales to clients.
If you are looking to factor receivables seek out and speak to a trusted, credible and experienced Canadian business financing advisor who can assist you with your business factoring and A/R financing needs.
7 Park Avenue Financial :
South Sheridan Executive Centre
2910 South Sheridan Way
Suite 301
Oakville, Ontario
L6J 7J8
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7 Park Avenue Financial provides value-added financing consultation for small and medium-sized businesses in the areas of cash flow, working capital, and debt financing.
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. He is an experienced
business financing consultant
.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 financing 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
7 Park Avenue Financial/Copyright/2020
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