Understanding Cash Flow For Business and Why Receivable Factoring Just Might Be The Solution

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Receivable Financing: A Viable Trade Finance Cash Flow Solution for Canadian Businesses

Choices. Alternatives. Robert Johnson, an old blues legend, wrote of being at the 'crossroads' and had choices.

Canadian businesses, small and medium-sized enterprises (SMEs), constantly seek reliable options within the Canadian business financing marketplace. Whether small players or large corporations, the need for cash flow & working capital solutions for business growth remains constant.

Alternative Financing through Accounts Receivable Factoring

For those facing challenges obtaining sufficient working capital financing from traditional banks, receivable factoring emerges as a viable solution. Unlike banks, which often consider the overall financial picture, receivable factoring focuses solely on the asset.

If your company can secure complete financing from a Canadian chartered bank, you likely have the ultimate cash flow protection. Yet, very few businesses fit into this category after the global business financial downturn of 2008-2009 and the COVID epidemic.

Receivable factoring might be more costly in certain instances, but it enables you to operate your business differently.

Understanding Receivable Financing – A Useful Tool for Business Growth

Receivable financing, also known as factoring, has long existed as a financing tool. However, it has remained somewhat under the radar in Canadian business financing, often viewed as an alternative method of business financing option.

How Does Receivable Factoring Work?

In essence, receivable factoring is the sale of your receivables to a third party, either as a one-time transaction or on an ongoing basis. You receive funds almost immediately, focusing solely on the value of your receivable. It doesn't create additional debt for your balance sheet and provides control over your receivables, monetizing them to the extent you desire.

Control and Usage of Funds in Business Operations

The key advantage is control. You decide how much to borrow, when, and how to utilize the funds. Generally, our clients invest these funds to foster more growth and profits in their businesses.

7 Park Avenue Financial recommends Confidential Receivable Financing, allowing businesses to bill and collect their own receivables while at the same time achieving all the cash flow benefits of a non-bank receivable finance solution.

Perceptions and Reality of Receivable Financing Costs

While the perception is that receivable factoring as a cash flow solution is expensive, the reality may differ. Typical costs of a factoring fee range from .8 - 1.25% per month, but the benefits include unlimited sales and profit growth, the ability to take supplier discounts, enhance supplier relationships, purchase smarter, and increase A/R and inventory turns.

Conclusion - Is Receivable Financing Right for Your Business?

Only you can determine if receivable financing and factoring is the working capital solution your business needs. The availability of choices and alternatives you may not have previously considered makes this a viable option.

Call 7 Park Avenue Financial, a trusted, credible, and experienced Canadian business financing advisor who can assist you in choosing the best financing path when you find yourself at a crossroads.

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

What Is Receivable Factoring, and How Does It Work?

Receivable factoring is a financial transaction where a business sells its receivables (invoices) to a third party (called a factor) at a discount. This provides immediate cash flow for the business without waiting for clients to pay their invoices to payment terms. The factor takes on the responsibility of collecting the payment, allowing the company to focus on growth and operations.

Why Would a Business Choose Receivable Factoring Over Traditional Bank Financing?

Traditional bank financing via traditional financing institutions often considers the overall financial health of a business and may have strict requirements. Receivable factoring focuses solely on the quality of the receivables and doesn't add debt to the balance sheet. This makes it more accessible for businesses not qualifying for traditional bank loans, with many factoring companies providing a quicker and more flexible cash flow solution.

Is Receivable Factoring Expensive, and How Are the Costs Calculated?

The cost of receivable factoring typically ranges between 8% / annum to 1.25% per month for factoring fees, depending on the agreement with the factoring company. While invoice factoring for commercial or government clients might seem more expensive than a line of credit via traditional loans or a merchant cash advance, the benefits like unlimited sales growth, the ability to take supplier discounts, and increased inventory turns often outweigh the costs of a factoring agreement.

What Are the Benefits of Receivable Factoring for Canadian Businesses, Particularly Small and Medium-Sized Enterprises (SMEs)?

Receivable factoring offers numerous benefits for Canadian SMEs, including immediate access to cash as the factoring company pays the firm immediately - often same day, enhanced control over finances and cash flow issues, and the ability to grow without the constraints of slow-paying clients. It also allows businesses to operate without taking on additional debt, making it a strategic tool for the financial management of operating expenses as well as business expansion.

How Can a Business in Canada Get Started with Receivable Factoring, and What Should They Consider?

A business interested in receivable factoring can start by contacting a reputable Canadian factoring company or financial advisor experienced in this area.

Considerations include understanding the terms of the agreement, the receivable factoring cost involved, and ensuring that the chosen accounts receivable factoring company partner aligns with the business's unique needs and goals. Speaking with a credible Canadian business financing advisor can help navigate these considerations and ensure a successful implementation of an invoice financing strategy.

How Does Factoring Affect Cash Flow?

Factoring positively affects cash flow by providing immediate access to funds that would otherwise be tied up in accounts receivable. By selling invoices to factoring companies, a business can quickly convert outstanding invoices into cash, thus improving liquidity and enabling more flexibility in managing expenses, investments, and growth opportunities.

Is Factoring an Operating Cash Flow?

Yes, debt factoring/accounts receivable financing, is considered an operating cash flow for short term financing. It's part of a business's daily operations, converting sales made on credit terms into immediate cash. Factoring accounts receivable enhances the operating cash flow, reflecting the cash generated from the core business activities.

How Do You Account for Factoring Receivables? Factoring Receivables Accounting

Accounting for factoring receivables depends on whether it's a sale of receivables (without recourse) or a loan (with recourse).

Without Recourse: In non recourse factoring, the receivables are removed from the balance sheet, eliminating payment risk and the cash received, along with any fees, is recorded. Any loss or gain from the transaction is recognized in the income statement as the factoring company takes responsibility for credit risk.

With Recourse: In recourse factoring, receivables may remain on the balance sheet, and the cash received is recorded as a liability. The fees and interest are recorded as expenses. The exact accounting treatment can vary, so consultation with an accountant or financial professional familiar with the applicable accounting standards is recommended. The factoring company assumes no risk for bad debt when the company is selling unpaid invoices.

What Happens to the Cash Flow If the Account Receivables Increase?

If accounts receivable increase without a corresponding increase in cash collections, it may indicate that more funds are tied up in unpaid customer invoices until the customer pays the invoice - as measured by the days sales outstanding formula.

This could lead to a decrease in available cash flow. Factoring accounts receivables / unpaid invoices can counteract this effect by converting those increased receivables into immediate cash, thereby maintaining or even enhancing the cash flow.

Without account receivable factoring or other financing strategies, a significant increase in accounts receivable might strain the company's liquidity and hamper its ability to meet short-term obligations and invest in growth opportunities.

Citations - Mian, S., & Smith, C. (1992). Accounts Receivable Management Policy: Theory and Evidence. Journal of Finance, 47, 169-200. https://doi.org/10.1111/J.1540-6261.1992.TB03982.X.

Sopranzetti, B. (1998). The economics of factoring accounts receivable. Journal of Economics and Business, 50, 339-359. https://doi.org/10.1016/S0148-6195(98)00008-3.

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Tuesday, August 15, 2023