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The Benefits Of Confidential Accounts Receivable Financing
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HOW YOUR BUSINESS CAN USE ACCOUNTS RECEIVABLE FINANCING
An effective accounts receivable finance solution has the ability to 'supersize' your overall working capital and cash flow.
This can be even more enhanced with a business accounts receivable finance strategy known as C I D - Confidential Invoice Discounting; a type of 'factoring' that has worked very well for our clients at 7 Park Avenue Financial. Let's dig in
HOW DOES A BUSINESS USE ACCOUNTS RECEIVABLE FINANCING
When your business uses a accounts receivable financing solution, it enters into an agreement with a bank or a commercial finance company / factoring company. The receivable assets on a business's balance sheet represent one of the largest and most liquid assets on your balance sheet. Those receivables represent money owing to your firm for products or services you have billed to clients but remain unpaid.
Most lenders view the quality of a business's accounts receivable when providing financing around working capital and growth issues. Lenders will measure asset turnover in accounts receivable as a measure of the business being able to pay current liabilities such as accounts payable.
Although the investment a company makes in accounts receivable is a cost of working capital the ability to convert the accounts receivables into cash is always a challenge! Banks, asset-based lenders, and factoring companies step in to assist the business with cash flowing those receivables.
How can this business finance solution be 'supersized' then? Simply that it is highly possible that on the utilization of this type of financing, you will often double, and in some cases triple, your access to immediate cash flow and working capital. Business owners and their financial managers will be surprised to know that, in most cases, even traditional bank financing won't provide the same cash flow access as this little-known solution.
And safe to say that in some cases where you would have been self-financing or had non-financing in place whatsoever, well, your firm has it now!
SELLING RECEIVABLES / ASSIGNING RECEIVABLES- ACCOUNTS RECEIVABLE FINANCING VS TRADITIONAL LOAN STRUCTURES
The majority of non-bank financing of accounts receivable in Canada is structured as an asset sale - The documentation and factoring agreement signed by the business specifies the sale of the receivable to the financing firm. As an example, some banks may use to choose to sell off some of their loans in the same manner.
The business selling the receivables receives cash for those receivables. A typical advance rate for a non-bank a/r financing firm is in the 90% range - which is much higher than bank advances on receivables which are funded in the 70% range - That is one of the more significant benefits of third-party a/r financing. Factoring companies pay the company the same day as the invoice is generated, and most factoring agreements allow you to finance which receivables you wish to fund - without obligation to fund all.
If a company is not using Confidential a/r financing, the factoring finance company assumes collections. In Confidential non notifIcation financing company bills and collects its own a/r!
Companies are still required to take on normal bad debt risk associated with their clients as factoring companies don't want to take on bad debt risk without charging more for their service.
HOW MUCH DOES A FACTORING COMPANY CHARGE?
So what in fact, is the cost of this unique and innovative AR Finance solution, how does it work, and what can your company compare it to when assessing your specific cash flow needs?
C I D is our terminology for Confidential Invoice Discounting. 'Factoring' solutions are used by firms of all sizes (even major corporations, by the way) but seem to be more common in the SME (small and medium enterprise sector).
It even accommodates start-ups if you can believe it, as any type of financing for a start-up is often a major challenge for the business owner. By the way, the big boys have a fancier name for their AR financing solutions - Securitization.
Companies that sell on credit in Canada will always have an investment in their accounts receivable, often representing, along with inventories, a huge part of their overall business assets. Accounts receivable management best practices will always include proper financing facilities.
So how is that asset financed? That becomes even more challenging when traditional bank financing is unavailable. A large majority of clients we talk to don't qualify for some or all of the business capital they need via a bank.
That's exactly where business accounts receivable invoicing and discounting come in. Your ability to 'sell' those invoices as you generate them, using the A/R as collateral, allows your company to turn into an instant cash flow machine. It's all done by a fairly seamless process when you are working with the right type of facility and the best firm/financing partner.
So that’s the essence of factoring or invoice discounting, but where does our key benefit of confidentiality come in? Right about here!
The key difference between Confidential Receivable Finance facilities and business factoring is that you control your sales ledger and customer base, not the factor finance firm. That gives you superiority over other firms who use this type of financing but are forced by their factoring agreement to make their customers aware of how they are financing their firm. In talking to clients here at 7 Park Avenue Financial, that benefit is huge in their minds regarding how their competitors and suppliers might view them.
HOW DOES A/R FINANCE WORK? REQUIREMENTS AND APPLICATION
When it comes to the underwriting process, a business lender such as a receivable finance firm focuses on several key issues in approving and setting up a facility. Several key factors affect how the financing is priced relative to financing cost. Factoring costs are expressed as fees versus interest rates.
Typically firms selling to larger, well-known companies or the government can get more favourable pricing based on the overall quality of the a/r. The time that a receivable is outstanding also plays a key factor in pricing and overall collection, and DSO turnover will affect factoring and financing fees.
On a daily basis, a/r financing works in the same manner as what we will call 'traditional' accounts receivable finance and invoice discounting. It’s a simple process.
You generate invoices for the products and services that your firm provides, and you receive immediate same-day funds for 90% of the invoice value. (That remaining 10% is held back until your client pays, you then receive the 10% less a finance fee of anywhere from .75 -1.5% per month).
The way our clients look at it is that the 1-2% per month reduction in gross margin is more than offset by all the cash flow their sales generate - allowing them to run and grow the company on an ongoing basis.
ADVANTAGES OF CONFIDENTIAL INVOICE DISCOUNTING
Clearly, the advantages of this type of business financing couldn’t be more pronounced :
- Financing is approved quickly
- Easy to administer
- Your company bills and collects its own a/r!
- Improved cash flow - Cash flows generated are used to run and grow the business
- Increased working capital enhances the long-term growth potential
- A/R Financing is flexible and tailored to business needs
- Accounts Receivable factoring solutions can be accessed in days and do not require external collateral
- Financing of receivables is not a term loan structure, and no fixed payments are required
So, does a solid AR Finance strategy seem like the proper cash flow solution for your firm? Ultimately you will decide that - we're simply letting you in on the secret and letting you be the decision-maker around supersizing that cash flow.
KEY TAKEAWAYS - ACCOUNTS RECEIVABLE FINANCING SOLUTIONS
A/R Financing solutions provide business capital for the investment a company makes in carrying accounts receivable
Financing solutions can be structured as a loan or assignment via a bank, or an asset sale to an asset-based lender/factoring firm
CONCLUSION
Speak to 7 Park Avenue Financial, a trusted, credible and experienced Canadian business financing advisor with a track record of business finance success. Get your company ahead of the pack and competitors.
FAQ FREQUENTLY ASKED QUESTIONS PEOPLE ALSO ASK MORE INFORMATION
What is accounts receivable financing?
Accounts receivable financing is a financing arrangement where a business receives early/immediate payment of outstanding invoices they wish to finance - In return for cash received the financing or factoring firm charges a fee. While receivables financing from a bank is an accounts receivable loan for the unpaid invoices on the company's balance sheet, financing capital is provided by a business line of credit secured by the money owed to the business.
Small businesses benefit from asset-based lending factoring solutions where they can immediately sell unpaid invoices for cash when the invoice is generated for products or services the business has sold.
Do banks offer accounts receivable financing?
Banks offer accounts receivable financing for firms selling on a business-to-business / trade finance basis. That allows a company to extend credit terms to customers and grow sales revenues - When the business provides a product or service to a client, and an invoice is generated, the bank can include the invoice in a bank receivables finance/line of credit for drawdown by the company. Banks take an assignment of accounts receivable to provide the funding, typically secured by a general security agreement on all the company assets.
What are the advantages and disadvantages of A/R Financing?
The advantage of a/r financing is the ability of a business to receive cash without going through a loan approval process or waiting for bank approval, for which many small businesses can't qualify. Factoring companies also assist in the collection of the account receivable. Accounts receivable funding solutions are an excellent choice for startups who often have financing challenges.
Historically there was a negative connotation to factoring services, but in current times thousands of businesses and even major corporations use the service. Financing costs and factoring fees are perceived by some owners as high. Still, business owners often do not consider the opportunity cost of business capital and their ability to fund ongoing operations and growth.
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