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Cash Flow Financing Via Factoring Clarified!
Cash flow financing for Canadian business owners and financial managers is about knowing what options are available when external finance solutions are being evaluated. Looking for one solution that's incredibly misunderstood in the Canadian business financing landscape. We've found it. Business A/R Finance! We've got your questions, as well as the answers! Let's dig in.
WHAT IS BUSINESS RECEIVABLE FINANCE
Business receivable financing ( aka receivables financing ) is a method of business financing that allows a business to transform accounts receivables via a financing facility via a bank or commercial finance company. Funding is for invoices issued to customers for products and services provided to clients with payment not yet made - allowing for the financing of structural cash flow gaps in the company business model.
TRANSFORMING RECEIVABLES INTO CASH!
Accounts receivables will often be the most significant balance on the balance sheet under the category of current assets - those current assets will also include inventories. These are short-term assets representing liquidity in the business.
Receivables financing is a benefit to businesses that sell on credit terms to customers, which becomes a cash flow gap in the business as payments are not received while inventory purchases and other short-term liabilities, such as accounts payable, must be paid; when a company extends longer payment terms to clients, the situations are exacerbated as those regular ongoing sales create cash flow gaps that widen further as the business sells more.
Funding solutions for startups and new businesses are also accessible.
Many businesses operate in seasonal or cyclical industries that create large increases in cash outflows during peak periods, creating potential cash flow crunches as collections have not yet been made.
Receivables finance may be a challenge if a business is experiencing unusually high bad debt volume or who have sales that are disputed by clients around issues such as service, damage, quality, etc - Also, businesses with fast turnovers, such as e-commerce clients of some retailers who have short payment term cycles are not the best candidates for A/R finance.
Business lenders in receivable finance will focus on the general creditworthiness of the customers, and funds are drawn down on outstanding invoices. Factoring companies that are non-bank in nature fund receivables immediately as sales are generated and charge a discount fee for the financing service.
Businesses need to understand the benefits of receivable financing and the potential drawbacks when they commit to a bank or factoring facility.
5 EXAMPLES OF RECEIVABLE FINANCING
What amount of funding can you expect to receive from your A/R base?
Typical advance rates for most facilities revolve around the 90% mark... which assumes you are dealing with the right commercial financier - More on that later. That additional 10% is in effect a holdback of sorts. We would point out that Canadian chartered banks only margin A/R at 75%, so commercial business receivable finance offers more liquidity. One other key point on funding is that your access to capital is virtually 'unlimited' as long as you have sales and legitimately earned receivables.
How does a firm set up a receivable facility?
We generally advise that it takes approx 2-3 weeks to set up a proper facility - that is a general guideline. You will know, by the way, very early on in the process if you are approved. After that, it's simply a question of documentation. Legal documentation and the paperwork process are very similar to bank financing and full-fledged A/R facilities are secured in the same manner as banks, typically a General Security Agreement.
By the way, stop us if you’ve heard us say this before. Still, you should consider CONFIDENTIAL RECEIVABLE FINANCE, allowing you to bill and collect your own accounts with no notification to suppliers, customers, etc. Want to be the talk of the town? You will be among your competitors as this type of NON-NOTIFICATION financing will have competitors wondering how you can finance your business so successfully.
Talk to the 7 Park Avenue Financial team about how confidential non-notification a/r financing can benefit your firm.
What's the cost of receivable financing /factoring?
Fees and costs. Various factors come into play here, the credit quality of your firm in general (it does not have to be as solid as you think), the size of your facility, the nature of your industry, etc. On balance, a solid business receivable finance fee in Canada is .75-1.15%% if you're billing and collecting on a 30-day term.
If your company can absorb a 1 or 2% decrease in gross margins to in effect obtain all the cash flow/working capital you need, that in effect, should be your consideration.
What receivables can be financed?
The key point here is that only ' business’, i.e. B2B a/r can be financed in Canada, so those companies with a consumer A/R base cannot take advantage of cash flow financing. Retailers typically look to other forms of finance for finance options in the consumer marketplace - i.e. Working capital loans, inventory loans, Merchant Cash Advances, etc.
Any North American receivable can be financed, and if your firm has overseas receivables, a credit insurance policy can assist in the financing of those receivables.
Age of receivables that can be financed
As a pretty general rule, only A/R that is under 90 days in age can be financed via this method of Canadian business financing. One can safely assume of course, that if you haven’t collected your accounts by that time there is an element of uncollectibility or bad debt in your A/R portfolio. There are potential exceptions to the rule but your ability to turn over receivables based on your published selling terms is critical to successful ' factoring ' finance.
CONCLUSION - CASH FLOW FINANCING FOR GROWING COMPANIES
Has confusion gone away? We hope so. The bottom line? When considering working capital finance via business receivable financing ensure you've got the right information at hand to make an informed decision.
Call 7 Park Avenue Financial, a trusted, credible, and experienced Canadian business financing advisor for your ability to get on track with cash flow finance with business loan solutions tailored to your business needs.
FAQ: FREQUENTLY ASKED QUESTIONS / PEOPLE ALSO ASK /MORE INFORMATION
What is business receivable finance?
Business receivable finance is also known as accounts receivable financing or invoice financing and ' factoring ' . Using this type of financing allows businesses to generate cash flow based on the use of outstanding invoices the collateral for the financing facility.
What is cash flow financing?
Cash flow financing is any type of financing that helps a business access funding based on the anticipated cash inflows of the business. Solutions for cash flow finance include receivable financing via banks, factoring invoices via non-bank commercial finance companies and business lines of credit from asset-based lenders.
How can business receivable finance help my business?
Business receivable finance helps a business by providing access to working capital that can b used to fund daily operations and allowing the business to manage growth and expansion plans - Funding is based on sales revenues and helps companies with cash flow management.
What are the benefits of cash flow financing?
The benefits of cash flow financing solutions included better liquidity and the flexibility to access working capital when needed when cash flow gaps occur in the business's cash flow cycle. Financing receivables speeds up the cash flow cycle of a business and reduces DSO ( days sales outstanding )
Receivables financing is a solid cash solution for small businesses that are growing faster than the borrowing capacity of the business. Companies can accept larger orders and fund seasonal peaks in the business using cash flow techniques in a/r finance management.
How do I know if business receivable finance or cash flow financing is right for my business?
If a business is selling on trade credit terms and has cash flow gaps in the business based on the investment the company makes in carrying receivables, receivable financing can assist in funding working capital.
What are 4 forms of receivable financing
Four common types of receivable financing include :
Invoice factoring
Invoice Discounting
Asset-based lending credit lines
Supply chain financing
Invoice factoring allows a business to ' sell ' an invoice to a third-party finance company, known as a business factor. The company receives immediate cash for the money owed, and traditional factoring firms will collect the receivable and keep a percentage of the invoice in exchange for the company receiving the cash upfront. Typical advances from factoring companies are in the 90 percent range, much higher than bank advances on accounts receivable.
Invoice discounting is similar to factoring as commercial finance companies/factoring company advances a percentage of the invoice value on invoicing by the company so it cans receive early payment on the sale of products and services.
Asset-based lenders use receivables to collateralize lines of credit or loans. Funding for an accounts receivable loan is made on a pre-agreed advance rate and as payments are collected by the company the loan facility is reduced. Asset-based credit lines for receivable loans often combine inventory and equipment assets on the company's balance sheet into one credit facility.
Supply chain financing/purchase order financing allows suppliers to receive payment earlier than typical trade credit terms which can help small businesses.
What is the difference between accounts receivable financing and invoice financing?
Both accounts receivable financing and invoice financing/factoring are similar in that they both fund outstanding invoices, which are the collateral for the financing. The main difference between the two methods is the ownership of the invoices in the financing agreement/financing facility.
Under invoice financing /factoring, the finance agreement specifies the sales of invoices to the financing company, and the finance company typically assumes collection- In receivable financing, using banks as an example, the business retains ownership of the invoices, which are used as collateral.
In certain types of non-recourse invoice financing, the finance company assumes bad debt and collection risk. In contrast, receivable finance solutions specify the client is responsible for collection and non-payment. Businesses also have the option to purchase accounts receivable insurance/credit insurance in a commercial relationship with the finance firm.
Invoice financing and factoring are typically more costly than account receivable financing, but advances in factoring and invoice finance are higher, providing higher loan-to-value funding.
Invoice financing is the transfer of control of the collection process, while typical bank receivable financing is the company still responsible for collecting payment and client interaction.
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