How To Crack The Code In A/R Cash Flow Financing
( Immediately ) !
Factoring Financing in Canada has a limited number of options, and factoring is certainly becoming one of them. When we meet with Canadian business owners and financial managers to discuss their working capital and cash flow problems, customers are either self-financing or requiring cash flow assistance, or their current financing needs do not provide them with the working capital and cash flow they require.
Although invoice factoring has a long history and is the way many businesses acquire short-term capital, a ' factoring loan ' does not bring debt to your balance sheet. Here's what you need to know.
THE CHALLENGE OF ACCESSING BANK FINANCING IN CANADA
Canadian banks are among the strongest and most successful in the world - part of that reason is their somewhat conservative stance to Canadian business financing - That conservative stance serves shareholders very well, but certainly doesn’t help small and medium-sized business owners achieve their financing needs.
So where does your business get the cash flow it needs? Long-term borrowing, i.e. what the finance people call 'term debt' is not really the solution for day-to-day operating and working capital needs. Companies generate cash from the 'current assets' portion of their balance sheet. That involves the following asset categories:
Cash
Inventory
Accounts Receivables
Invoice Factoring via commercial factoring companies in Canada focuses on turning receivables into immediate cash. And Yes, there is a cost and a process but those costs and that way of doing business can be properly justified with the help of a trusted and credible advisor in this area of Canadian working capital finance.
When we meet with business owners to discuss their working capital needs it is essential they understand their working capital situation and requirements. You don't need to be a full-fledged chartered accountant to measure your working capital situation and needs.
HOW TO ASSESS YOUR WORKING CAPITAL AND CASH FLOW NEEDS
By taking a few numbers from their financial statements customers can monitor the level of working capital to fund the business, and make payments on any debt the company has i.e. loans, leases, etc.
Those calculations are very simple but not always properly understood or monitored by our customers. For example, determine your current working capital by taking your current assets and subtracting current liabilities - it’s as simple as that. Then monitor this number against the following items:
Sales
Total assets
Total liabilities
By - at least on a monthly basis - analyzing these very basic numbers will show your trends in your working capital needs and any deterioration that might be setting in.
IS INVOICE FACTORING THE SOLUTION TO YOUR BUSINESS CAPITAL NEEDS?
Well, to this point we have discussed the problem - Is ' discount factoring ' the solution? It can be as long as the business owner understands what it costs and how it works. Would the business owner prefer to access cash immediately on making a sale, or wait 30 days to .. yes.. 90 days to collect a receivable? The fast application process and fast funding are why thousands of businesses, including your competitors, use third-party a/r finance via invoice factoring companies.
FACTORING COST? HOW MUCH DO FACTORING COMPANIES CHARGE
Factoring works as follows if you have properly structured a facility for your own particular business model and way of doing business. You simply sell, or ‘factor’ accounts receivable invoices as you generate them. You receive 80-90% of the money immediately, the balance on payment from your customer.
There is of course no 'free lunch' in Canada so a financing fee, or 'discount fee' is deducted from the funds due you. In Canada this can be in the range of 1 to 2 1/2% on average- that is known as the factoring discount. Your ability to negotiate the best fee and the type of facility that suits your daily paperwork is probably going to come from working with a trusted and credible advisor in this area of Canadian Finance.
RECOURSE VERSUS NON RECOURSE FACTORING
How does accounts receivable factoring work when it comes to your credit policy? Canadian businesses can choose to maintain their current bad debt and credit risk policy via a standard recourse factoring agreement, or they can choose to access a non recourse facility which allows the company to transfer the risk to the factoring company at a higher facility cost.
How Factoring Can Make Your Company More Successful
Understanding the basics of factoring in Canada revolves around understanding why a Higher turnover of receivables, i.e. via factoring, is a great indicator of a successful company. Your company is in a better position to invest funds, pay creditors in a timely fashion, and grow and profit your business.
If your firm could sell more because it had the working capital to finance receivables and inventory and purchase more goods you are turning over assets constantly and generating more profit. Therefore the 1-2% cost of the factoring is hardly what the Canadian business owner should focus on.
THE COMPETITIVE ADVANTAGE IS BEING SUCCESSFUL VIA FACTORING SOLUTIONS
Does factoring make sense for your business? You can also extend credit terms to major customers or new potential customers, which becomes a major competitive advantage - like your firm your customer also views 'cash as king' and will probably reward you with new business. Offering larger amounts of credit to good customers, with great payment terms is a great way to increase your competitive presence via the factor companies solution.
CONCLUSION
Want to take your business further with the experts in small business lending in Canada. It's important to know what to look for in a factoring company in Canada!
At 7 Park Avenue Financial we offer the best factoring company solution to clients - Confidential Receivable Financing - it allows your firm to bill and collect your own receivables on a full or selective basis - Talk to our team for more info.
Factoring might not be the solution for every firm in Canada, most certainly it is not - BUT - if you can't get the financing you need it's a solid working capital Canadian alternative. For Canada factoring solutions speak to 7 Park Avenue Financial, a trusted business financing advisor to get the facility that suits your business and needs. Learn the main reasons why factoring is a good choice for your companies growth finance needs.
FAQ: FREQUENTLY ASKED QUESTIONS
What is Factoring -
The process of factoring invoices allows a company to sell its invoices to an invoice factoring finance company and access cash immediately for the investment they hold in outstanding A/R. The transaction removes invoices from the balance sheet and adds cash to the bank account. Businesses can factor finance all their receivables or selective invoices.
What factoring companies do?
A factoring company specializes in invoice factoring, or purchasing outstanding invoices from businesses that have slow paying customers and are looking to boost cash flow. This allows a business to access cash immediately after issuing an invoice, instead of waiting 30-90 days for the customer to pay
Is a factoring company worth it?
Invoice factoring and financing works for business owners that require cash and who can demonstrate they have reliable customers that have a history of paying invoices on time - A company should be able to demonstrate good gross margins to afford the 1-2% factoring fees that come with selling invoices to a third party.
ADDITIONAL RESOURCES:
Here's a great article from Inc. Magazine on the business of factoring - Click here for the article
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2910 South Sheridan Way
Suite 301
Oakville, Ontario
L6J 7J8
Email = sprokop@7parkavenuefinancial.com
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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.
Click here for the business finance track record of 7 Park Avenue Financial
Stan Prokop
7 Park Avenue Financial/Copyright/2021
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