YOUR COMPANY IS LOOKING FOR FINANCING VIA WORKING CAPITAL FACTORING!
YOUR GUIDE TO CAPITAL AS A WORKING CAPITAL SOLUTION IN CANADA
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THE BENEFITS OF FACTORING FOR IMPROVING WORKING CAPITAL
Factoring for working capital needs in Canada is quickly becoming a recognized and traditional strategy for cash flow financing. We say traditional because for many years factoring via Canadian factoring companies in Canada was viewed as a non-traditional and alternative financing strategy.
A bank is a place where they lend you an umbrella in fair weather and ask for it back when it starts to rain." - Robert Frost
Poet Robert Frost probably wasn't talking about factoring accounts receivables to obtain cash, but he highlights the risk around being too heavily reliant on traditional financing options such as bank credit!
INTRODUCTION - ACCOUNTS RECEIVABLE FACTORING AS A FINANCING SOLUTION IN CANADA
Small businesses in Canada constantly struggle with cash flow management issues - that challenge of covering operating expenses, the purchasing of materials, and asses for the business is a challenge - Factoring services helps those cash flow issues business experiences, allowing the company to finance accounts receivable at a slight discount to third party business factors.
The simple explanation around this financing tool is that it allows Canadian firms to access financing and cash flow immediately to smooth out the ups and downs of any company's business cycle.
WHAT DOES A FACTORING COMPANY FINANCE
Firms in Canada utilize the strategy for short term working capital needs. Invoice factoring is not a term loan. Most business owners don’t realize that factoring as a financing strategy brings no debt on the balance sheet. We could comfortably argue that your balance sheet looks better when using this financing tool. It, in effect, allows you to satisfy short terms needs for payroll, purchase of inventory, etc.
WHAT IS THE IMPORTANCE OF FACTORING IN WORKING CAPITAL MANAGEMENT?
Factoring is a valuable tool to manage working capital in your business because businesses can instantly convert sales, i.e. accounts receivable, into cash. By financing ( selling ) invoices to the factoring company, the enterprise receives immediate same-day cash to fund day-to-day business needs around suppliers and current liabilities on the balance sheet - The bottom line? Cash flow is improved, and the business can operate more efficiently and effectively.
By reducing the need for traditional financing via term loans or lines of credit, the company can maintain liquidity at times when conventional channels for funding are limited for a business - A factoring company focuses on the creditworthiness/credit quality of your accounts receivable base versus the financial health of your business - Many companies cannot access some of all of the traditional bank financing they need to run and grow a business which is why accounts receivable financing is a valuable solution.
Using traditional factoring solutions, businesses also can transfer both credits and collect risk to the factoring company if they so choose - At 7 Park Avenue Financial, our focus is often on recommending a Confidential Receivable Financing factoring agreement, allowing a business to bill and collect its customer payments while reaping the immediate benefit of factoring - CASH FLOW!
Most factoring solutions will also allow the business owner and financial manager to finance the receivables invoices they choose to finance, so this finance solution is the ultimate in short-term cash flow gap solutions. Any business requiring ongoing cash flow needs to operate successfully and manage asset turnover, and credit risk should consider receivable financing as a Canadian Business Financing solution.
BENEFITS OF FACTORING - IMPROVED CASH FLOW / QUICK ACCESS TO FUNDS / IMPROVED RISK MANAGEMENT AND ASSET TURNOVER
A factor financing strategy has significant benefits if utilized properly (more about that later). Some of these benefits include:
- The ability to purchase more inventory on a short-term basis at preferred pricing and quantities
- Access a working capital credit facility that many times are significantly higher than what your firm could achieve with bank financing.
- Increase sales with the right customers by offering better payment terms than your competitors (cash flow is king for your customers also!)
- Take advantage of payment discounts offered by suppliers – many firms offer discounts such as 2% ten days – by taking advantage of these discounts, you can remove a huge portion of your factor financing discounts
EVALUATING FACTORING AS A WORKING CAPITAL SOLUTIONS
We can’t overemphasize the need to ensure you understand the Canadian factoring market. It differs significantly from the U.S., and some enhancements to a factor financing strategy can supercharge your cash flow. For instance, by combining an A/R facility and an inventory financing scenario, you can often at least double all your firm's previous liquidity. That’s a powerful cash flow statement.
Also, for firms that are factoring now, we are quite convinced, after talking to clients, that they either don’t understand factoring pricing or in some cases have been misled about what they are really paying for this type of financing. Even improving your factor facility by ½ % can drive profits straight to the bottom line. Clients are encouraged to seek a trusted, credible, and experienced advisor such as the team at 7 Park Avenue Financial in this area , who can help them achieve the right factoring facility for their firm.
We also encourage clients to seek out factor facilities that don’t lock you into long term contracts, as our experience indicates your firm might be a candidate for other forms of financing at some point down the road.
WHEN SHOULD A COMPANY CONSIDER FACTORING?
5 REASONS TO CONSIDER FACTORING FINANCE
1. The ability to cash flow slow-paying customers will allow a business to fund daily operations and invest in growth
2. Companies with a limited credit history or who do not have the financial strength to access financing via traditional financial institutions such as banks can access business funding for ongoing capital needs
3. Businesses that have cyclicality or seasonality to some aspects of their business can benefit from overcoming cash flow fluctuations that help smooth out the cash flow cycle of a business
4. Growth opportunities such as expansion into new markets or international markets can be funded by sales financing and receivable factoring
5. Service-oriented businesses that do not have assets or collateral required by banks can still access working capital
We spoke previously of properly utilizing a factoring financing strategy. By that, we mean that you should ensure you understand what you are paying, as some firms have methods of presenting factoring in a method to confuse the customer about overall ‘all in' cost. Things to look for are clear per diem pricing – you want to ensure you only pay for what you use in your facility. Open contracts make more sense for your firm; why would you let a finance firm lock you into a contract? Other things to look for are the advance rates on your transaction.
Most business owners understand the basic mechanics of factoring – they are of course:
- Your firm ships or delivers your goods and services
- You invoice and receive same-day cash for your invoices – usually in the range of 80-90%
- Your customer pays the invoice and at that time you receive the original amount that was held back, minus the factoring discount fee
U.S. Based firms that offer factoring in Canada are heavily involved in the entire process that we just walked through. They often insist on verifying your invoices, talking to your customer about payment, etc. Our recommended solution to eliminate this intrusiveness is a factoring or working capital facility that allows you to bill and collect your own receivables.
KEY TAKEAWAY - WORKING CAPITAL FACTORING
Factoring improves cash flow by providing immediate cash for outstanding invoices generated by business-to-business sales
Cash flow access is immediate - often the same day or the next day at the latest
Obstacles to traditional financing are eliminated as receivable finance is a viable alternative to traditional bank loans that have significant requirements around personal guarantees, collateral, and the bank requirement for strong financial statements.
Companies can better manage credit risk by utilizing non-recourse financing solutions, credit insurance, or utilizing the collection expertise of business factoring companies
Factor financing is often tailored to a business or industry's particular needs around the cash flow gaps in the business.
Any business selling on trade finance/credit terms to business customers domestically or internationally can access factor financing working capital solutions.
Increased buying power - cash flow from receivable financing can be used to maximize inventory purchases.
Factoring will often be an intermediate solution for a company to improve the business credit history and make the journey back to traditional financial solutions.
CONCLUSION
Factoring for working capital is a proven strategy. The challenge becomes being an educated business owner. Find out what benefits apply to your firm when utilizing this type of financing, and investigate the best facility for overall ease of doing business and pricing. That’s cash flow 101! For working capital factoring.
Call 7 Park Avenue Financial, a trusted, credible and experienced Canadian business financing advisor to discuss your business financing needs.
FAQ: FREQUENTLY ASKED QUESTIONS / PEOPLE ALSO ASK / MORE INFORMATION
What is factoring, and how does it work as a working capital solution?
Factoring is a business financial transaction in the area of asset based lending which allows a business to finance its sales by selling unpaid invoices to a third-party commercial factoring company at a discount to obtain immediate cash instead of waiting for payment from the client. This form of financing allows a business to finance daily operations and cover business needs around current liabilities and short-term obligations.
How can factoring benefit businesses in terms of working capital?
Factoring benefits businesses by providing access to cash needed to cover the investment a business makes in working capital accounts such as accounts receivables and inventory - Cash flow is improved when the company cannot access traditional financial options from banks for short-term working capital loans or business credit lines to fund business operations. Companies cash choose between non recourse invoice or traditional recourse factoring based on credit and collection policy and bad debt experience.
What potential drawbacks or risks are associated with factoring as a working capital solution?
Factoring financing is more costly than bank financing based on the factoring fee that the invoice factoring company charges. Firms using traditional notification factoring have a potential loss of control in the collection process, and customer relationships can become a concern. Not all businesses are suitable for factoring.
What types of businesses can benefit from factoring as a working capital solution?
Any business that sells on trade credit in any industry has the potential to benefit from factoring. Longer payment terms can be offered to clients that can be financed via a factoring solution.
How can businesses determine if factoring is the right working capital solution?
Businesses should consider factoring receivables for working capital by assessing factors determining their working capital needs with a business advisor to determine if they can benefit from factoring as a working capital solution for immediate cash flow as a line of credit alternative.
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