Alternative Financing For Business Cash Flow In Canada

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Accounts Receivable Factoring In Canada 

 

Alternative business financing for some folks might mean thoughts of their ' first trip to the rodeo '.

 

Not us though, so we're sharing some of the best invoice factoring company cash flow solutions for immediate financing for your sales revenues that are available in Canada today.

 

INTRODUCTION

 

Factoring is an alternative financing solution that addresses the cash flow struggles of business owners.

It allows businesses to convert the investment in accounts receivable into immediate cash, providing a boost to positive cash flow and supporting ongoing growth and business needs.

Traditional financing options often fall short for businesses seeking working capital, particularly small to medium-sized enterprises and SME companies in Canada help power the economy.

Financing receivables in different ways available offers an attractive alternative, enabling businesses to cash flow their accounts receivable.

 

  

WHAT IS FACTORING?  

 

Factoring is a financial transaction where a business sells its accounts receivable to a third-party factor at a discounted rate. This provides the business with immediate cash instead of waiting for customers to pay their invoices.

 

The factor takes over the responsibility of collecting payment from customers, allowing businesses to access funds for expenses, growth initiatives, and maintaining cash flow. Factoring is well-suited for industries with extended payment cycles, such as manufacturing, wholesale, and transportation. It enables businesses to unlock the value of their unpaid invoices and convert them into working capital, addressing their financial needs.

 

Many private companies in search of SME COMMERCIAL FINANCE solutions have the one prerequisite for this type of financing: Sales and a customer base!  These firms often cannot secure funding from what we term ' traditional banks  ' because they can't satisfy some of the basic criteria for bank loans and business revolving credit facilities to draw funds

 

. An investment in a/r will find the business needs large amounts of cash if cash flow decreases drastically, or the time period for a relatively low level of cash flow lasts long.

 

 

 

ACCOUNTS RECEIVABLE FINANCING - BACK TO A HEALTHY BALANCE SHEET! 

 

Therefore invoice discounting becomes a logical and readily available solution for the business owner as your firm receives cash for a significant portion of the invoice value ( typically 90% ) before customers pay. This funding option is preferred by many businesses because it does not involve a long-term commitment.

 

 

WHAT ARE THE BASIC REQUIREMENTS IN ORDER TO GET A FACTORING FACILITY IN PLACE 

 

Those requirements? Strong financial statements, assets, collateral, cash flow, and positive credit history. Have we forgotten anything? Yes, that focus is on personal guarantees.  (Note - Personal guarantees are a part of almost any financing for small to medium businesses - but with Canadian banks, they are a key focus point) Due diligence is often completed very quickly via an efficient application process.

 

FACTORING VERSUS TRADITIONAL FINANCING OPTIONS

 

While factoring offers numerous benefits, it's essential to understand how it compares to traditional financing options from traditional financial institutions such as Canadian banks.

Here are some key differences:

 

1. Creditworthiness: Unlike traditional financing options that prioritize a strong credit history and collateral, factoring relies on the creditworthiness of customers. This enables businesses with imperfect credit or limited assets to still access capital through factoring without collateral or emphasis on personal guarantees.

2. Time to funding: Traditional financing methods via banks and business-oriented credit unions involve lengthy application and approval processes, causing delays in accessing funds. In contrast, factoring offers immediate same-day cash as a company generates sales revenues, ensuring quick and seamless access to working capital via a streamlined financing process.

3. Debt vs. sale: Traditional financing involves taking on additional debt with interest charges and repayment obligations. Factoring, however, entails selling accounts receivable without incurring debt or interest charges, providing businesses with cash reserves and funds without adding to their debt burden. No debt comes onto the balance sheet!

4. Credit management: With traditional financing, businesses must handle credit and collection processes themselves. Factoring allows businesses to outsource these tasks to the factor, saving time and resources. Past due payments in excess of invoices older than 90 days cant be financed as they infer uncollectibility.

5. Funding limits: Traditional financing options often have funding limits based on collateral or creditworthiness. Factoring provides funding based on the value of accounts receivable, allowing businesses to access a larger amount of capital. As a company grows the factoring facility grows also.

 

 

WHAT ARE COMMON MISCONCEPTIONS ABOUT FACTORING RECEIVABLES?

 

Factoring, despite misconceptions, offers several benefits that debunk common misunderstandings about funding receivables -

1. Factoring is not only for struggling businesses: Factoring is utilized by successful businesses of all sizes as a strategic tool to manage cash flow and support growth. It is suitable for startups as well as well-established companies across various industries. Some of the largest businesses in Canada utilized this method of financing - Larger corporations call it securitization!

2. Factoring is cost-effective: While factoring involves fees for the funding of the unpaid invoice, the value it provides in terms of improved cash flow, working capital access, and outsourced credit management often outweighs the cost. Additionally, factoring can help offset expenses by taking advantage of early payment discounts from suppliers.

3. Control of customer relationships is maintained: When partnering with a factoring company that offers non-notification a/r financing businesses retain control of their customer relationships. The factor acts as a financial partner, not a customer service representative. Businesses can continue to communicate with customers and uphold existing relationships.

4. Factoring is a proactive financing solution: Factoring is not a last resort but a proactive approach to financing. By leveraging accounts receivable, businesses can access the capital in their business bank account at their current financial institutions - no need to change banks! - Allowing the business to capitalize on opportunities and achieve growth objectives. Factoring empowers businesses to take control of their cash flow and drive profits and growth.

 

 

 

WHY A/R FINANCING WORKS!

 

Why does accounts receivable financing, aka ' invoice factoring' work so well then? For one reason it's because your clients are often broadly diversified and represent a good credit risk to the lender in terms of diversification. Firms whose client base includes larger well-known companies find themselves in even better shape when it comes to negotiating receivable finance rates and terms.

 

WHAT IS  THE BEST A/R FINANCING SOLUTION?! - SPOILER ALERT - ITS ' CONFIDENTIAL'

 

Our recommended solution in this whole area? We thought you would never ask! It’s CONFIDENTIAL RECEIVABLE FINANCING – Allowing your firm to bill and collect its own invoices, thereby financing all your sales, with no notification to any supplier, client, etc.! Check it out. The factoring fee is also very competitive.

 

Firms that are ' service ' firms find themselves even in greater need than typical mfg type companies. That's because one of their prime expenses is payroll which creates a high cash flow need, coupled with the fact that they don't have a heavy investment in fixed assets, inventories, or other collateral. In the cases of ' tech ' firms, their assets might in fact often be the intellectual property of intangibles such as software, etc.

 

Even if your clients are overseas/international those receivables can also be financed under a factoring solution by adding a credit insurance component to your borrowing facility as a strong add-on tool for a  small business expanding internationally.

 

  

  

  

 

 WHY DO COMPANIES UTILIZE INVOICE FINANCING?        

 

If there is one reason (among many) that thousands of business owners/financial managers utilize invoice factoring / A/R financing is that it's fast and flexible. In the case of growing companies, the problem is even more basic:

 

Their revenues are growing faster than their access to credit lines!

 

Why does the factoring company itself like your business? Simple! They aren't lenders per se, they don't offer business debt, they are simply purchasing your receivables on an ongoing basis in order to provide your firm with the working capital it needs. No new debt comes on your balance sheet.

 

Unlike our regulated Canadian banking system factor firms don't have any of the legal or regulatory issues that challenge major Canadian financial institutions such as banks and insurance companies.

 

  

CASE STUDIES AND SUCCESS STORIES   

 

At 7 Park Avenue Financial, we've worked with numerous companies that have utilized an a/r financing solution or a full-service asset-based lending line of credit -

 

1. Company A, a manufacturer in the industrial equipment sector, overcame cash flow challenges by utilizing factoring. The immediate cash obtained from factoring invoices allowed them to meet supplier payments and invest in new equipment. With improved cash flow, Company A experienced significant growth, fulfilling larger orders and expanding its customer base.

2. Company B, a transportation company, utilized factoring to address fuel costs and payroll challenges arising from delayed customer payments. Financing receivables allowed the company to secure immediate cash flow and utilized it to maintain its fleet, cover expenses, and hire additional drivers. This improved capacity and cash flow positioned Company B as a reliable and competitive player in the transportation industry.

3. Company C, operating in the staffing industry, faced payroll obligations due to lengthy payment terms from their clients. By partnering with a factoring company, they accessed immediate cash for their invoices, ensuring timely payment to their employees. This improved cash flow allowed Company C to attract more clients, expand its workforce, and diversify service offerings.

 

 

 

The bottom line - any company selling business to business with valid accounts receivables for products or services delivered can benefit from accounts receivables financing.

 

 WHAT INDUSTRIES USE FACTORING AS A WORKING CAPITAL SOLUTION? 

 

Factoring is a versatile financing solution that can benefit businesses across various industries. Here are some examples of industries that can leverage factoring:

 

• Manufacturing: Factoring helps manufacturers bridge cash flow gaps caused by long payment cycles, enabling timely payment to suppliers and investment in production capacity.
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• Wholesale: Wholesalers can utilize factoring to access immediate cash for invoices, ensuring a continuous flow of working capital to restock inventory and meet customer demand.
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• Transportation: Factoring assists transportation companies by providing immediate cash for invoices, allowing them to cover expenses, invest in equipment, and expand their operations.
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• Staffing: Factoring supports staffing agencies in meeting payroll obligations by offering immediate cash flow, ensuring timely payment to employees and attracting new clients.
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• Construction: Factoring benefits construction companies by providing immediate cash for invoices, ensuring timely payment to subcontractors and suppliers, and facilitating the pursuit of new projects.

 

 FACTORING AS A GROWTH STRATEGY?

 

Factoring offers small businesses a powerful growth strategy by unlocking the value of their accounts receivable. Here are ways in which factoring contributes to the growth of small businesses:

1. Increased working capital: Factoring provides immediate cash flow, enabling small businesses to cover expenses, invest in marketing and sales, and pursue growth opportunities.

2. Improved cash flow management: Factoring bridges the gap between invoicing and customer payments, ensuring a consistent cash flow. This helps small businesses meet financial obligations, pay suppliers on time, and maintain a healthy operation.

3. Ability to seize opportunities: Factoring provides working capital that allows small businesses to seize growth opportunities. This includes investing in equipment, hiring staff, and expanding into new markets.

4. Outsourced credit management: Partnering with a factoring company allows small businesses to outsource credit management tasks. The factoring company handles credit evaluation, payment monitoring, and collections, freeing up resources for core operations and growth strategies.

 

  

 

KEY TAKEAWAYS  

 

Factoring offers several key advantages that make it an attractive financing option for businesses:

1. Improved cash flow: Factoring ensures a steady stream of working capital and cash flow by providing immediate cash for invoices, allowing businesses to meet short-term business needs and financial obligations as well we investing in growth opportunities.

2. Access to working capital: Factoring is accessible to a wide range of businesses, providing them with access to working capital that may be unavailable through traditional financing options.

3. No debt on the balance sheet !: Factoring involves the sale of accounts receivable, not taking on additional debt. This means businesses can access funds without incurring interest charges or repayment obligations.

4. Outsourced credit management: Factoring companies offering traditional a/r factoring handle credit evaluation, payment monitoring, and collections, saving businesses time and resources to focus on core operations.

5. Flexible financing solution: Factoring can be customized to fit the specific needs of each business, offering ongoing working capital or a one-time boost as required.

6. Potential for growth: Factoring unlocks the value of accounts receivable, providing funds for investments in equipment, staffing, and market expansion, fueling business growth.
    

  

  

 

CONCLUSION - RECEIVABLE FACTORING    

 

Factoring is a powerful alternative financing solution that provides numerous benefits to businesses of all sizes and industries.

 

It improves cash flow, offers access to working capital, provides outsourced credit management, and enables growth opportunities. By unlocking the value of accounts receivable, businesses can overcome cash flow challenges, invest in expansion, and achieve growth objectives.

 

It is important for businesses to carefully assess their needs and consider options like factoring, supply chain finance, or PO financing to support their growth and success. The ultimate goal is to choose the financing solution that aligns with their specific requirements.

 

Financing via a factor solution is a strong viable alternative for Canadian businesses that cannot access traditional bank financing. It's a solution that monetizes assets and brings cash, not debt to the balance sheet. The ability to convert sales into cash immediately is a key differentiator of this type of business capital solution.

 

If you’re tired of chasing down financing solutions that make the best sense for your firm and industry call   7 Park Avenue Financial,  a trusted credible and experienced Canadian business financing advisor in alternative funding who can assist you with your cash flow and factoring company needs via a wide array of finance solutions.

 

  

  

FAQ: FREQUENTLY ASKED QUESTIONS / MORE INFORMATION    

 

What is factoring and how does it work?

Factoring is financial transactions when firms sell their receivables (also known as invoices) to other parties at a discount. Account receivable finance is a definition that describes a type of investment in credit to customers. Factoring is an excellent alternative form of financing to complement your cash flow needs supplied by factoring companies and some factoring loans via online lenders. 

Alternative financing options such as a/r financing provide businesses with funding by allowing a business to sell its outstanding receivables.

It can be especially beneficial for businesses that have not been in business long and may lack business assets and an established credit history with traditional lenders, but still need some way to get paid immediately as a firm generates sales. The application process is typically easy compared to traditional financing via banks, etc.

The personal credit score of the business owners is not a key factor in factoring finance approval for a factoring agreement. Some factoring firms provide online lending solutions for invoice factoring, similar to online loans for short-term working capital. Companies qualify for invoice factoring based on the value of their receivables.

 

The working capital loans differ because they are term loans in structure and are sometimes also known as a merchant cash advance,  which can come with high-interest rates, unlike when a business sells unpaid invoices for factor finance funding according to payment terms provided to their clients for approved invoices.

 

This ongoing access to cash flow via a factoring service is key to the benefits of commercial funding of a/r via invoice factoring companies. Late payments from clients are a negative cash flow factor that factoring solves without long-term contracts. Most startups can also use this method of financing as an alternative to a business loan/bank loan.

 

Factoring companies provide an affordable and flexible alternative to traditional financing for companies that have good gross margins.  Factored invoices allow small businesses without long-established banking records to have the opportunity for working capital. The Commercial Finance Association is the industries trade association for asset-based lending and factoring in the U.S. and Canada.

 

 What is alternative finance? 

 

Alternative finance refers to forms of financing outside the traditional financial system and Fintech is a category in alternative finance improving on these methods. Alternative finance is an ecosystem of companies, technology, and processes that aims to improve traditional methods for financial transactions.

These non-traditional methods are used to fund enterprises with firms that have the software and back-office functions for business funding.  Fintech solutions allow other companies to finance operations successfully when traditional financing may not be available.

 

 What is invoice factoring, and how does it work?

 Invoice factoring is a type of alternative financing where a business sells its outstanding invoices or accounts receivable to a third-party company, known as a factoring company. The factoring company pays the business a significant portion of the invoice amount upfront, providing immediate cash flow. When the factoring company collects the full payment from the customer, it then pays the remaining balance to the business, minus a fee for the service.

 

 What is the difference between recourse and non-recourse factoring?

 

 In recourse factoring, the business agrees to buy back any invoices that the factoring company cannot collect payment on. It's the most common type of factoring, as it limits the risk to the factoring company. Non-recourse factoring, on the other hand, means that the factoring company assumes most of the risk from customers who don't pay their invoices. The terms of non-recourse factoring can vary, and not all factoring companies offer this type of factoring due to the increased risk.

 

 What are some benefits of invoice factoring?

 

 Invoice factoring offers several benefits. It provides businesses with immediate access to cash, which is especially beneficial for small businesses that may struggle with cash flow due to long payment terms. It also often comes with easier approval than traditional bank loans, as the factoring company bases its decision primarily on your customers' payment history rather than your credit score. Other benefits include outsourcing accounts receivable activities and maintaining good customer relationships as the factoring company handles collections.

 

What are some disadvantages or risks associated with invoice factoring?

 

 Despite its benefits, invoice factoring comes with potential drawbacks. The cost can be higher than traditional financing, with fees often ranging from 1 to 5% of the total invoice amount. The factoring process also requires the business to depend on the payment habits of its customers, which could affect the cost of factoring. Other challenges include the potential loss of control over customer relationships and the risk of being unable to recoup costs if customers don't pay their invoices (in the case of recourse factoring).

 

 What are some alternatives to invoice factoring?

 

There are several alternatives to invoice factoring, including supply chain financing and purchase order (PO) financing. Supply chain financing allows businesses to assume the credit profile of their customer, often leading to lower interest rates and fees. PO financing provides funding to fulfill specific purchase orders, which can be beneficial for businesses facing cash flow constraints due to large or unexpected orders.

 

 How does factoring work? 

 

The process of factoring is relatively straightforward. Once a business decides to factor its invoices, it enters into an agreement with a factoring company. The business submits its outstanding invoices to the factor, which then evaluates the creditworthiness of the customers and determines the amount it is willing to advance.

Upon approval, the factor typically provides an immediate cash advance of around 80% of the invoice value. The remaining 20% is held in reserve and released to the business once the customer pays the invoice in full, minus the factor's fee. The factor takes on the responsibility of collecting payment from the customers, saving the business time and resources.

Factoring is a flexible financing solution that can be tailored to the needs of each business. Some factors offer recourse factoring, where the business is responsible for buying back any uncollectible invoices. Others offer non-recourse factoring, where the factor assumes the risk of non-payment. This allows businesses to choose the option that best suits their cash flow needs and risk tolerance.

 

What is the role of Fintech in alternative financing in Canada

 

Technological advancements have expanded the options and accessibility of alternative financing for businesses. Some of these ' equity oriented ' solutions include -

1. Peer-to-Peer (P2P) Lending: P2P lending platforms connect lenders directly with borrowers, bypassing traditional financial institutions, and how this form of alternative financing works.

2. Crowdfunding as a Financing Option: Different types of crowdfunding (donation, reward, equity, and debt)  are available and businesses can choose to investigate how these platforms can be used to raise funds for businesses.

3. Venture Capital and Angel Investing: While very few businesses are eligible for this type of equity financing many tech companies are potential candidates if they can demonstrate high growth and traction

4. Understanding Merchant Cash Advances:  a merchant cash advance is a short-term working capital loan on an installment-term loan basis

5.  

 

What is the difference between Invoice Factoring vs. Invoice Financing

 

Although invoice factoring and financing may seem similar, they operate differently. In invoice factoring, the factoring company takes ownership of the invoices and handles the collection.

In contrast, invoice financing provides a business with a cash advance, with the invoices serving as collateral. The business is still responsible for collecting payment. The best option for a business depends on its cash flow needs and its comfort level with handling collections.

 

 

 

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