Factoring and Invoice Cash Can Boost Your Business

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Unlocking the Benefits of Factoring and Invoice Cash: A Comprehensive Guide

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SOLVING THE CHALLENGES OF BUSINESS CASH FLOW

INTRODUCTION

Businesses often face numerous challenges when it comes to managing their cash flows and the ability to maintaining a steady cash flow is vital for any business to stay afloat. With often limited resources, many businesses may struggle to secure loans or lines of credit from traditional financial institutions.

That is when invoice financing / factoring comes in as a viable solution - allowing a business to cash flow their receivables / unpaid invoices , thereby improving cash flow without the need to take on any balance sheet debt .

WHAT IS INVOICE FACTORING AND HOW DOES IT WORK?

Invoice cash - can a factoring or working capital facility actually reduce your financial expenses and allow your business to grow at any rate profitably? Invoice factoring involves 3 parties - the company , the customer, and the factoring company.

Factoring is a business financing solution that allows business to finance accounts receivable in exchange for immediate cash . Under traditional ( we can call them old school ) invoice factoring companies can also assume responsibility for payments to the company - At 7 Park Avenue Financial our recommended solution for factoring finance is Confidential Receivable Financing, allowing a company to bill and collect its own invoices, with no notification to clients.

Businesses that have good quality receivables can receive approx 90% of the invoice value as invoices are generated - ie the factoring company pays same day! The balance of 10% is returned to the company when the client pays, less financing factoring cost.

TRADITIONAL FINANCING OPTIONS FOR BUSINESS

Traditional financing options for businesses / small business owners in Canada include term loans, lines of credit, business credit cards, etc.However, these options may not be suitable for all businesses and bank loans require collateral and a strong business credit history as well as a good personal credit history from owners . Some traditional finance options take on additional debt to the balance sheet which can add an additional layer of risk for the business.

FACTORING / FINANCING ACCOUNTS RECEIVABLE A GREAT SOLUTION FOR BUSINESS CASH FLOW?

When is comes to understanding the challenges of business cash flow it often becomes an issue of being unable to predict sales revenue and cash inflows.

Businesses will experience fluctuations in sales revenue for a variety of factors - Some of those factors include:

Seasonality or Cyclical trends in the business and industry

General economic downturns in the economy

Unexpected expenses

Inability to access working capital loans or business lines of credit from traditional financial institutions due to their limited financial history or lack of collateral.

This can make it difficult for small businesses to access the capital they need to grow and expand their operations.

FACTORING FINANCING IS A GROWING TREND IN A BUSINESS FINANCING STRATEGY

Canadian business owners and financial managers keep hearing about firms that 'factor' their accounts receivables, their 'invoices. ‘ This is a growing trend in Canada that has caught on to a financing strategy that has been successful in the U.S. for several years. Any company with outstanding invoices and good receivables can qualify for invoice factoring , aka invoice discounting and can use invoice factoring profitably.

WHAT DOES INVOICE FACTORING COST?

Is there a ' perfect ' financing solution for your firm that provides you with unlimited working capital and is actually cheaper than bank financing when you realize that you are carrying receivables 30, 60, and 90 days on your balance sheet?

While we might agree there is no 'perfect' financing solution for all Canadian firms everywhere, we strongly feel that we can very EASILY demonstrate that invoice cash, known as factoring or receivable discounting, will take your firm to the next level of sales and profits.

IS FACTORING A CHEAPER ALTERNATIVE TO BANK FINANCING? YOU DECIDE

Let’s get back to our statement of how you can reduce your financial expenses and grow your sales at any growth rate. We will even add that you can 'profit' from this financing strategy.

HOW FACTORING CAN REDUCE FINANCE EXPENSES AND GROW SALES REVENUE AT ANY RATE PROFITABLY

We have to get a little technical here, but bear with us! --

AN EXAMPLE OF A FACTORING TRANSACTION

Let’s say your firm has sales of 1 Million dollars, you have 40% gross margins, and you have operating costs of 38%, leaving you a 2% net income on your sales. Included in those costs are your bank financing costs from, for example, a Canadian chartered bank. We would point out that your bank credit line has a limit, and at a certain point, your customers are paying you in 30, 60, and 90 days. You are fully utilizing your line of credit. Are you able to take new orders and contracts without new external financing - we don’t think so!

DOUBLED SALES / NO EXTERNAL FINANCING / INCREASED PROFITS

So what's the solution?! We have one for Canadian business owners or their financial managers. Let us set up a working capital factoring facility for you. The kind that we prefer is 100% non-intrusive - that is to say, you will continue to bill and collect your own accounts receivable.

We call it non-notification. Ask any other firm if they like how their factoring facility works. If they don’t have a non-notification facility, they will tell you they don’t necessarily like it for several reasons, mainly customer intrusion, etc.

So we have our facility set up. You take on new orders and contracts and double your sales to 2 Million dollars.

Your competitors start talking about you!

Using the factoring or invoice cash facility, you get paid the same day that you invoice clients.. At the end of the year, your sales are 2 million, they have doubled! Your net profit would be 130k, not 20k; you would have paid 70k in factoring and financing costs and still have made a lot more profit - in our example 110k more profit.

THE CASH CONVERSION CYCLE - FACTORING AND ASSET TURNOVER IMPROVE RETURN ON ASSET / RETURN ON EQUITY AND NET PROFIT !

Again, we realize we're getting a little technical and accounting oriented in our example and explanation - so what is the layperson's bottom-line explanation of what just happened - It is as follows -

You doubled your sales, you had no concerns about external financing or taking on new debt, and your profits went up a lot!

Technically what happened is what KPMG calls on their website the ' Cash conversion cycle ' - you have turned over assets much quicker. Therefore you have a greatly improved return on assets, return on equity, and net profit.

BENEFITS OF FACTORING FOR A BUSINESS FINANCE SOLUTION

Benefits of factoring for business include

Improved working capital - companies can meet short term obligations and avoid temporary cash flow shortages

No additional debt or financial obligations - Factor Finance does not add debt to the balance sheet

Access to capital - companies unable to access traditional financing can secure business capital to grow and expand

Reduced administrative burden - Businesses who utilize notification type factoring can transfer credit and collection responsibility to the factoring finance company

CONCLUSION -

Factoring offers several benefits - including improved business cash flow, access to capital, and reduced administrative expenses around the credit and collection cycle . Factoring is not a loan per se , so small businesses do not take on additional debt or financial obligations. Choosing the right factoring company is essential for small businesses to maximize the benefits of factoring. Factoring can be a viable solution for small businesses that are experiencing working capital shortages or need access to capital to grow their operations.

In summary, invoice cash, factoring, receivable discounting, or whatever you want to call it (at our firm, we call it a working capital facility) works. It can work for you.

Call 7 Park Avenue Financial, a trusted, credible, and expert business financing advisor, and run the numbers. You will find you just got off the cash flow merry-go-round, and that’s a good thing.

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

What are Common misconceptions about factoring

There are several common misconceptions about factoring - so it is important to understand how to use this financial tool -

Factoring business receivables is expensive -

Factoring fees can vary depending on the size of the accounts receivable and the creditworthiness of the customers as well as the size of the credit facility However, factoring fees are typically lower than the interest rates charged by traditional financing options such as long term loans - In some cases factoring can be less expensive than bank financing

Factoring will damage customer relationships -

Factoring companies are experienced in handling customer relationships and will work to maintain positive relationships with the customers. Additionally many companies have the option of considering non-notification factoring financing solutions - allow them to bill and collect their own invoices - factoring can allow a business to offer more flexible payment terms to their customers, which can improve customer satisfaction and increase sales Slow paying customers can also be financed, as long as the unpaid invoice is less than 90 days old.

Factoring is only for businesses with poor credit -

Factoring is used by companies of all size, including large corporations - Factor finance is based on the creditworthiness of the accounts receivable base , so any company with good customers can benefit from receivable finance.

How do business owners choose the right factoring company for a business?

Choosing the right factoring company is essential for small businesses to maximize the benefits of factoring. When choosing a factoring company, small businesses should consider the following:

Fees - financing costs vary, so small a company considering a/r finance should compare fees from different lenders to ensure they are getting a competitive rate.

Customer service - Businesses should choose a factoring company that offers excellent customer service, including prompt same day payment and efficient collection of accounts receivable.

Industry experience

Some factoring companies specialize in certain niche industries, for example trucking and staffing agencies - Businesses should choose an invoice factoring company that has experience working with businesses in their industry and is properly geographically located

Companies should carefully review the contract terms offered by the factoring company, including the length of the contract, the termination clause, advance rates, and any miscellaneous fees that occur when comparing invoice factoring vs other types of working capital financing or bank loan financing.

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Tuesday, May 30, 2023