Unlocking The Benefits Of Receivable Financing & Invoice Factoring In Canada Invoice To Cash - Your Guide To Factoring & A/R Financing In Canada

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HOW INVOICE FACTORING COMPANIES ( CANADA ) WORK

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ACCOUNTS RECEIVABLE FACTORING & FINANCING IN CANADA - YOUR GUIDE TO HOW IT WORKS AND WHAT IT COSTS 

 

 

Considering Receivable Financing in Canada? If you are, your thoughts and answers on two questions should help you out quite a bit when it comes to invoice factoring in Canada.

 

HOW CAN  MY BUSINESS IMPROVE CASH FLOW?

 

One of our favourite business writers recently focused on cash flow management and asked the following 2 questions -

 

1. Does your firm need cash right now?

2. Do you know what your cash balance needs will be a half year from now?

 

The fact that you are even considering an invoice factoring company/factoring fund in Canada suggests your business might be facing cash flow challenges or perhaps that you're smart enough to address a future problem now!

 

 

WHAT IS FACTORING 

 

The basics of factoring finance are easy to understand - setting up a factoring facility allows you to, at your choice, sell invoices to an invoice factoring company, reducing your receivables and adding immediate cash flow to your balance sheet.

 

The ' sale ' is made via a ' fee, 'not an interest rate. It is typically  .75%-1.25% / mo - the fee varies via several factors, including the size of your facility, overall quality and collectibility of the receivables, industry credit risk, etc. - For example, construction industry factoring might be viewed as having more industry risk.

 

Although some business owners consider the whole process as ' factoring loans, ' the reality is that you are simply accelerating a collected account receivable's cash flow benefits. That ' invoice purchasing ' allows you to turn your company into a cash flow machine at your option.

 

 

WHAT IS THE DIFFERENCE BETWEEN INVOICE FACTORING VERSUS ACCOUNTS RECEIVABLE FINANCING?

 

Invoice factoring agreements stipulate the actual sale of outstanding receivables to factoring companies, which are usually independent non-bank commercial finance companies - On the other hand receivable financing as working capital and cash flow management solution use the accounts receivables of a business as collateral to obtain financing.

 

Banks offer unsecured loans via receivable financing solutions, and they typically register a general security agreement on the business's assets. So the receivables are assigned to the bank under this arrangement. Both factoring and a/r financing provide valuable business funding, and each method of small business financing has its advantages and disadvantages.

 

HOW DOES INVOICE FACTORING / ACCOUNTS RECEIVABLE FACTORING WORK IN CANADA? 

In Canada the invoice factoring company has a credit agreement with the customer to purchase invoices at a pre-agreed discount - In traditional ' old school ' factoring many factoring companies also assume the collection role in the funding process. When a client pays the company for the invoice the factoring company charges a fee on the invoice value and sends the company the funds less a fee for financing the invoice when the customer pays -

 

The benefit is that companies can receive cash flow immediately on generating sales of products and services to their customer.  Many factoring companies use invoice tracking and automation systems to fund client transactions.

 

  

 

IS INVOICE FACTORING AND RECEIVABLE FINANCING A GOOD OPTION FOR YOUR BUSINESS?  

 

Both invoice factoring and accounts receivable financing are solid credit risk management and cash flow solutions for small business financing in Canada. Businesses can improve cash flow and focus on collections management while obtaining cash advances for invoices before payment by the end user customer. 

 

However, business owners must weigh the benefits and drawbacks of these financing methods while considering issues around fees, interest rates, and credit risk.  Working with banks and reliable factoring companies is vital in assessing this method of Canadian business financing.

 

THE DIFFERENCE BETWEEN FACTORING AND  OTHER RECEIVABLE FINANCING

 

It's more of a technical issue that shouldn't concern business owners. Still, the paperwork around ' factoring' invoices an agreement to ' sell receivables ' - whereas using a bank credit line as an example, the bank holds security against the receivables because you ' assign ' your a/r to the bank under a traditional business loan arrangement - Somewhat much ado about nothing.

 

 

IMPORTANCE OF CASH CONVERSION CYCLE / OPERATING CYCLE

 

A/R finance allows you to address what's going on with your firm’s working capital rapidly. And by the way, it puts you in control, which you might not be feeling now regarding your firm's overall cash/ business cycle. When we meet and talk to clients quite often, it’s clear they don't necessarily feel in control of their finances.

 

When you can exert control over your cash with a receivable financing strategy, all of a sudden, the uses of cash seem a lot clearer. You can now make or take on new lease payments or reduce debt in other areas such as accounts payable. Keeping those suppliers and preferred vendors on the side is important, pretty well all the time!

 

 MAXIMIZE CASH FLOW VIA FAST FUNDING OF YOUR SALES REVENUES 

 

Let's cover some basics regarding invoice factoring in Canada, also known as invoice discounting. First, it’s a business-to-business financial strategy, so it doesn't really work in a Business to Consumer environment. (By the way, if you are selling into a retail environment, then a merchant cash strategy which finances future retail sales might work for your firm, but we digress...!)

 

WHAT DOES INVOICE FACTORING COST

 

The costs of receivable financing in Canada vary greatly, and it’s probably our most significant discussion point when we explain to clients the benefits and costs of an A/R finance strategy. 

 

What is important here is that you understand that the cost factor around receivable finance, in fact, is the costs you are bearing now, except that now you're winning, and using this financial solution allows you to win.

 

Business owners and financial managers must understand that  overall financing costs take into account a variety of key factors - Some of those factors include:

 

Overall creditworthiness of your client base

The size and the monthly volume of invoices to clients

In some cases, certain industries are major users of factoring - i.e. trucking/staffing companies, distributors, etc

 

 

Factoring costs are expressed as fees, not interest rates, and some factoring companies charge miscellaneous fees around applications, funds transfers, etc

 

On-balance factoring is more expensive than traditional bank accounts receivable financing but provides access to unlimited cash flow that otherwise might not be available from Canadian banks.  Startups in the Canadian economy can also access this method of financing, and firms can benefit from credit insurance and non-recourse financing programs.

 

The cost of receivable financing has to be benchmarked against two or three critical points you might not be considering. One is that you are already in the banking business, whether you like it or not because you are carrying your customers 30, 60, or 90 days already.  Congratulations on doing a great job in growing your client's cash flow - although that’s probably not your goal, right?

 

  

USE THE POWER OF RECEIVABLES FINANCING TO TAKE ADVANTAGE OF GROWTH FINANCING OPPORTUNITIES  

 

Secondly, you are potentially missing the opportunity to grow your business because of the cash flow constraint that invoice factoring in Canada solves under the challenge of carrying a company's accounts receivable investment.

 

At 7 Park Avenue Financial, we work with our factoring clients to ensure they understand the fees and cost of a/r financing and how they can benefit from this type of financing; focusing on a prompt collection of your invoices always reduces your costs of financing  - and we are not big fans of misc fees, set up costs, and locked-in contracts.

 

Our most recommended and successful a/r finance solution is  CONFIDENTIAL RECEIVABLE FINANCING, which allows you to bill and collect your own invoices and receive all the benefits of traditional, dare we call it  ' old school '  Canadian factoring companies.

 

If you want to learn more about invoice financing, how it works, what it costs, and the best facility out there when it comes to being 'in control,' then seek and speak to a business financing expert today.

 

You'll then see clear answers to those two nagging questions: Do you have enough cash today, and will you be able to address your cash needs a half year from now?

 

  

CONCLUSION

Invoice factoring allows your company to fund outstanding invoices via a third-party financing company in exchange for immediate cash, less a feel  Companies accessing receivable financing post their invoices as collateral for an invoice factoring loan/line of credit facility. Managing working capital and accessing business capital are key benefits of these methods of financing sales.

 

Factoring invoices is a solid solution to the cash flow problems of small and medium-sized businesses -  using financing companies in Canada for working capital increases cash, and as cash is added to the balance sheet, no debt is taken on by your company - you are simply monetizing your 2nd most liquid current asset - accounts receivable ( Cash is your most liquid asset !!  ) - In most cases, receivable financing is complementary with other lenders your firm utilizes for banking, loans, leases, etc.

 

Factoring receivables via a factored invoice program in Canada should not be confusing for your cash flow needs. Speak to 7 Park Avenue Financial, a trusted, credible, experienced Canadian business financing advisor who can assist you with your cash flow needs.

 

 

  

FAQ: FREQUENTLY ASKED QUESTIONS / PEOPLE ALSO ASK / MORE INFORMATION  

 

 

How does a business qualify for accounts receivable factoring? 

 

To qualify for accounts receivable factoring, a business must be able to meet specific lending criteria in the invoice discounting/factoring process -

1. Factoring is based on the general creditworthiness of  the customer of the businesses, so clients must generally be stable and have reasonable payment track records

2. Factoring is on a B2B basis and factoring does not apply to individuals - Government Receivables qualify for financing

3. Unpaid Invoices eligible for financing must be less than 90 days old -  invoices older than 90 days are generally deemed uncollectible by the accounts receivable financing company

4. Certain factoring companies may require a minimum of monthly or annual sales to ensure factoring makes sense for the factoring company from a cost and time perspective

5. Receivables  must not be encumbered by liens or other financing arrangements with other bank financing or a business loan from other  business lenders

6. Companies must acknowledge in the factoring agreement with the invoice financing company  the advance rates and fees under invoice financing for small business

 

 

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