Thursday, November 9, 2023

Boost Your Business Liquidity: The True Cost of Receivable Factoring





 

YOU ARE LOOKING FOR INFO ON FACTORING ACCOUNTS RECEIVABLE AND THE FACTOR COST OF THIS FINANCING! 

The Business Lifeline: Leveraging Factoring for Cash Flow

You've arrived at the right address! Welcome to 7 Park Avenue Financial 

Let us help your firm just like our hundreds of other satisfied clients.

        Financing & Cash flow are the biggest issues facing business today

   ARE YOU UNAWARE OR DISSATISFIED WITH YOUR CURRENT BUSINESS FINANCING OPTIONS?

CALL NOW - DIRECT LINE - 416 319 5769 - Let's talk or arrange a meeting to discuss your needs

Or Email us with any question on Canadian Business Financing

 

EMAIL - sprokop@7parkavenuefinancial.com

 

Factor Cost Factoring Accounts Receivable  | 7 Park Avenue Financial 

 

Click here for the business finance track record of 7 Park Avenue Financial

 

 

Invest time in this article because it details factoring's financial implications, a cornerstone for savvy cash flow management

 

 

Factoring Unveiled: A Deep Dive into the Costs and Returns 

 

 
The Growing Popularity of Accounts Receivable Financing in Canada 

 



Canadian business owners and financial managers who are considering financing accounts receivable often ask us how they can calculate, or more so, understand the factor cost of factoring accounts receivable.

There are a whole bunch of factors (excuse the pun) that seem to be coming together to make the financing of accounts receivable a high-growth, popular, and accepted method of business financing in Canada.

 

The reality is that even just a few years ago most business owners did not even realize that they could sell their accounts receivable to a private non-bank firm, gaining valuable working capital, i.e. cash flow! in the process.

 

 

The Drive Towards Factoring 

 



Business is being driven to this method of Canadian business financing out of a very basic need - meet payrolls, make fixed-term obligations, and purchase products and services.

 

And when your customers make you wait, 30, 60, and unfortunately 90 days for your funds all of a sudden factoring, also known as invoice discounting and receivable financing becomes very popular. Not hard to understand.



The Need for Understanding Accounts Receivable Factoring Cost



Business owners want to know more about factoring and receivable financing simply because they recognize that cash flow challenges hinder them from growing, and yes, even surviving.

And, we are sorry to say, many clients simply can’t get the bank financing they need to fund and grow their business - that isn't necessarily a condemnation of Canadian chartered banks, it’s a case of individual financing challenges within the current credit crunch and global economic challenges.

 

Opportunity Cost of Not Factoring

 

While the nominal fees associated with factoring are often discussed, the opportunity cost of not factoring is rarely considered.

 

For some businesses, not leveraging factoring could mean missed opportunities for growth or lost discounts from suppliers for early payment. By focusing on the cost of factoring alone, businesses may overlook the potential revenue growth or savings that could have been realized if they had immediate access to the cash tied up in receivables. This can include the ability to take on new projects, invest in marketing, or simply negotiate better terms with suppliers for bulk purchases.

 

 

Analyzing Factor Cost 



So, let’s cover off what you need and want to know about factor cost and the true way in which you should be looking at the pricing around factoring accounts receivable in Canada.


 
Key Drivers of Factoring Pricing
 



There are three; let's call them 'drivers' in the pricing process of financing your receivables in the factoring agreement. Those three drivers are the time in which it takes for your invoice to be paid, and we mean right down to the day when it comes to invoice factoring rates.

 

Secondly, the factoring firm calls their pricing a 'discount' - so the actual discount rate they quote you becomes critical in your knowledge of understanding your true cost of financing A/R.

 

Finally, to keep things simple we often explain to clients in the initial discussion that they receive immediate cash for their receivables once they finance them, i.e.a same-day cash advance


 

 

The Reality of Receivable Advances 

 



However, the reality is that the industry advances a (significant) portion of your accounts receivables, the rest is a holdback. Typically this portion is 90%, but many firms calculate total financing not just on the holdback but the invoice amount.

 


 
 Timing of the Holdback Release

 

When do I get the holdback? Ask clients. The answer is that they receive the holdback as soon as the actual invoice is paid.


 

 

The Focus on Discount Rate

 

We think it's clear that the discount rate, of the three key drivers we have mentioned, is the most focused on by clients. Because the commercial receivable financing industry is not regulated, firms charge what markets will bear.

 

 

Key Takeaways 

 

  1. Discount Rate/Factor Fee: This is the primary cost associated with factoring and is a percentage of the invoice value. It represents the fee charged by the factoring company for providing immediate funds and is often the most significant component of the overall cost. Understanding how this rate is calculated and what it encompasses will give you insight into a large part of the factoring expense.

  2. Advance Rate: This determines how much money you receive upfront and influences your immediate cash flow. Typically, an advance rate is around 70-90% of the invoice value. The remainder, minus the factor fee, is paid to you once your client settles the invoice. This rate directly affects the liquidity you gain through factoring.

  3. Time to Payment (Recourse Period): The amount of time it takes for the factoring company to get paid by your customers affects the receivable factoring cost. The longer an invoice goes unpaid, the higher the fee can be, especially in recourse factoring where the business eventually takes back the risk of non-payment.

  4. Volume and Quality of Receivables: These influence the factoring company’s risk and thus impact the cost of factoring receivables. A higher volume of invoices can lower the factor fee due to economies of scale, while the better credit quality of your customers may reduce the perceived risk, potentially leading to more favourable rates.

  5. Additional Fees: These can include service fees from the invoice factoring company, as well as administrative fees, or penalties for early termination of the contract or for invoices paid late by your customers. Understanding these additional costs is vital as they can significantly impact the overall cost of factoring if not managed properly.

 

 

Companies using Confidential a/r financing can realize all the benefits of collecting their own invoices with the same costs as traditional factoring solutions.




 Conclusion: Understanding Your Factoring Returns



In summary, understanding the returns of your commercial factor firm will better assist you in determining if this overall receivable financing strategy is for you.

 

Call 7 Park Avenue Financial, a trusted, credible and experienced Canadian business financing advisor to better understand the benefits of this growing method of financing your company.

 

FAQ

 

 

What is factoring accounts receivable?

 

Factoring accounts receivable is a financial transaction where a business sells its outstanding invoices to a factor company at a discount, in exchange for immediate cash.

 

How does factoring improve cash flow?

 

To understand how does Accounts Receivable Factoring Work requires focusing on the process of selling your unpaid invoices to a factor, where you receive most of the cash immediately, thus improving your working capital and cash flow without waiting for customer payments.

 

What is a discount rate in factoring?

 

The discount rate is the fee that a factoring company charges for providing immediate cash in exchange for your invoices. It's a percentage of the invoice value.

 

 Is factoring a loan?

 

No, invoice factoring is not a loan. It's the sale of your accounts receivable at a discount to an invoice financing company for immediate cash.

 

 What are the risks associated with factoring?

 

The main risk is the potential cost of factoring fees / factoring rates, which can be higher than traditional financing if not managed properly. There's also the reliance on your customers' creditworthiness since late payments may increase fees on the invoice factoring cost. Managing asset turnover and days outstanding in receivables reduces financing costs.

 

 Can any business use factoring for its accounts receivable?

 

Most businesses that generate invoices can use factoring services, but it's best suited for those with reliable customers and a steady volume of accounts receivable who might not be able to access approval for a bank line of credit.

 

 

 Are there different types of factoring services?

 

Yes, there are two main types: recourse and non-recourse factoring. Recourse factoring requires the business to buy back unpaid invoices, while non-recourse does not - in the latter the factoring company accepts risk for bad debt and collection.

 

 

Does factoring affect my business's credit rating?

 

Factoring doesn't typically affect your credit rating as it's not a loan. However, it requires your customers to have good credit since their payment history impacts the factor's risk.

 

 How quickly can I receive funds through factoring?

 

Funds from factoring can often be received within 24 to 48 hours after the factor has approved your invoices for purchase.

 

 

 Can I choose which invoices to factor?

Yes, many factoring companies allow you to select specific invoices to factor, giving you control over your financing needs and costs.

 

How Can Factoring Be A  Strategic Credit Management Tool?

 

Factoring is frequently viewed as a financing tool, but it can also be a strategic element in managing a company's credit risk.

By selecting a factoring arrangement with recourse, a business can effectively outsource its credit control and debt collection processes, which may reduce overhead costs and mitigate the risk of bad debt. In contrast, non-recourse factoring can serve as a form of credit insurance, protecting a company against customer insolvency.

Tuesday, November 7, 2023

Revolutionize Your Cash Flow with Receivables Business Financing & Factoring





YOU ARE LOOKING FOR RECEIVABLES BUSINESS FINANCING AND FACTORING!

Instant Capital: Transform Your Receivables into Cash

You've arrived at the right address! Welcome to 7 Park Avenue Financial 

        Financing & Cash flow are the biggest issues facing businesses today

   ARE YOU UNAWARE OR DISSATISFIED WITH YOUR CURRENT BUSINESS FINANCING OPTIONS?

CALL NOW - DIRECT LINE - 416 319 5769 - Let's talk or arrange a meeting to discuss your needs

Or Email us with any questions on Canadian Business Financing

                            EMAIL - sprokop@7parkavenuefinancial.com

Mastering Business Receivables Financing : A Factoring Strategy for Growth

 

Discover the untapped potential of factoring because your receivables could be the key to immediate cash flow and growth

 

 

The Factoring Advantage: Funding Solutions for Modern Businesses 

 

 

Introduction to Receivables Financing

 

Have you forgotten something? Perhaps it is just a case of overlooking or not knowing all your alternatives in business financing for working capital. Factoring receivables for cash flow is just one of those strategies you may have missed, not heard about, or not have fully understood accounts receivable financing, or investigated.

 

Understanding Factoring

 

 

Let's do a basic 'primer' on this somewhat unknown or misunderstood form of business financing. Many Canadian business owners or financial managers mistake factoring or the selling of your receivables as a 'loan'.

 

That is not the case, it’s simply the case of monetizing or cash-flowing your probably largest current asset, your receivables, and paying a financing charge or discount fee for the service.

 

 

How Factoring Works 

 

In general, approximately 90% of the value of an invoice is advanced to you pretty well the same day that you issue your invoice. Your regular obligation is to provide proof of delivery or acceptance of that invoice related to your goods and services.

 

Factoring is Not Just for Small Businesses 

 

We think that factoring receivables seems to be viewed as a small business financing tactic. Still, we can assure readers that some of the largest corporations in Canada utilize the tactic also - in some cases, it's simply jazzed up with a fancier name such as 'securitization' or financing via 'asset-backed commercial paper ', etc. So the big boys are doing it also! Don't forget that.

 

 

Factoring as a Gateway to Global Expansion

 

An uncommon perspective on receivables business financing is viewing factoring as a stepping stone to international trade.

 

By utilizing factoring services, companies can more readily finance international sales without the typical barriers associated with cross-border transactions, such as currency fluctuations, differences in legal systems, and the increased risk of non-payment.

 

Debt Factoring can provide the necessary cash flow to explore new markets and maintain operations while waiting for payments from overseas clients, effectively allowing businesses to scale globally with less financial strain.

 

Choosing the Right Factoring Partner

 

When clients talk about moving forward on this type of business financing, the largest challenges seem to be their ability to understand pricing, pick the right firm to work with, and finally, ensure that the daily flow of paperwork around this type of business financing makes sense.

 

If the wrong factor partner is selected, there are countless stories of firms that have experienced a negative level of customer intrusion around the whole factoring receivables process.

 

So choose your partner well, and probably the best info or advice we share in this regard is to seek the services of a trusted, experienced and credible business financing advisor who can steer you toward financing and cash flow success.

 

Qualification and Costs

 

A common question related to our 'primer' on factoring (also called invoice discounting or receivable financing) is: 'Do we qualify?'

 

The short and positive answer is absolutely!: if you have receivables, you qualify, that's what this form of business financing is about.

 

Addressing Factoring Financing  Concerns

 

Many business owners or their financial managers struggle with the cost of this type of financing which typically is in the 1 to 1.5% range in Canada.

 

The bottom line on the costs is simply that they will vary relative to the size of your receivables, the perceived credit quality, and the type of firm you contract with in this regard. That’s where the help of a Canadian business financing expert can help you immensely.

 

In fact, more often than not that expert can demonstrate how you can significantly reduce the cost of financing receivables to almost zero in some cases, but certainly a reasonable amount in most situations.

 

Understanding the cost implications of factoring is pivotal for businesses considering this financial tool for cash flow management. Factoring rates, often perceived as higher than traditional lending rates, must be assessed in the context of their impact on a company's cost of capital.

 

These fees are generally a percentage of the invoice value and can range from 1% to 2%, depending on the industry, volume of receivables, customer creditworthiness, and the factor's policies.

 

While these rates may initially seem steep compared to conventional loans, the overall cost of capital might be lower when considering the ancillary benefits, such as improved cash flow, credit risk mitigation, and administrative savings.

 

Negotiating factoring rates is a strategic approach to lowering the overall cost of capital. Businesses must conduct due diligence to understand the fee structure — which might include service fees, credit check fees, and other potential costs — and compare them with the comprehensive costs of other credit facilities.

 

It is essential to engage in transparent discussions with factors, armed with a clear understanding of one’s outstanding invoices and the credit quality of customers, to negotiate more favourable terms. The key advantage here is that, unlike fixed traditional lending rates, factoring fees can be more flexible and tailored to a company's specific needs and risk profile.

 

Companies might find that the effective rate of capital through factoring is competitive, especially when they account for the speed of access to cash, the reduction in bad debt expenses, and the elimination of the costs associated with managing receivables internally.

 

 

Benefits of  Factoring and A/R Financing Strategies

 

 

Optimizing working capital and balancing cash flow are critical aspects of a business's financial health. Factoring and Accounts Receivable (A/R) financing are two tools that can effectively manage these areas. Here’s how a business can leverage these options:

 

  • Immediate cash flow from credit sales via factoring, enhancing liquidity.
  • Reduced collection period due to factors managing collections.
  • The creditworthiness of customers is critical, benefiting businesses with strong clientele but weaker credit.
  • Capital from factoring is used for reinvestment, discounts, or growth without debt.
  • Factoring doesn't increase debt ratios; it's off-balance-sheet financing.
  • Factoring lines grow with receivables, offering flexible funding based on need.
  • Non-recourse factoring transfers bad debt risk to the factor, stabilizing cash flow.
  • Savings on in-house credit and collections department costs with factoring for companies using traditional factoring versus Confidential Receivable Finance
  • Predictable cash flow from factoring aids in financial planning and reporting.
  • Businesses can concentrate on core activities as factoring handles A/R management.
  • Factoring firms' credit assessments assist in setting customer credit limits.
  • Factoring provides cash flow to manage seasonal demand, supporting inventory or staff increases.

 

 

Factoring as a Financial Health Indicator:

 

Rather than just a tool for immediate cash needs, factoring can be leveraged as an indirect indicator of a company's financial health and efficiency.

 

Companies that engage in factoring can use their funding speed, the discount rate they receive, and the ease of the transaction process as metrics to assess their creditworthiness and operational efficiency. These factors can reflect how the market views its credit strength, the quality of its customer base, and its internal processes.

 

Continuous improvement in these areas, mirrored by more favourable factoring terms over time, can signal to stakeholders that the business is on a solid financial trajectory.

 

 

Key Takeaways 

 

  1. Understanding that factoring is not a loan but a way to sell your accounts receivable at a discount for immediate cash can be considered the cornerstone of receivables financing. This gives businesses immediate working capital instead of waiting for the payment terms of 30, 60, or 90 days.

  2. The Process of Factoring: Comprehending how factoring works is crucial. Essentially, when a business invoices its client, a factoring company pays the business a significant percentage of the invoice value upfront (usually around 90%) and then collects the total amount from the client. Once the client pays, the business receives the remaining 10%, minus a fee for the factoring service.

  3. Costs of Factoring: Grasping the costs involved, typically a percentage of the invoice value, gives an understanding of the trade-off between the immediate availability of funds and the expense of the service. The fees can range from 1% to 2.5%, which can be critical for cash flow planning.

  4. Qualification Criteria: Knowing that essentially any business with accounts receivable can qualify for factoring provides insight into its accessibility as a financing option.

 

Conclusion: Embracing Factoring as a Canadian Business Financing  Solution

 

So, what's our primer summary on receivables and business financing via factoring? If you’re reading this you probably have a business financing challenge. A/R financing is a method to eliminate that challenge.

 

Working hard on your finances is commendable; working smart with an expert is necessary. Investigate the solution that will bring cash to your firm’s door tomorrow.

 

Call 7 Park Avenue Financial, a trusted, credible and experienced Canadian business financing advisor who can assist you with your business financing and cash flow needs.

 

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

 



What is factoring in business finance?


Factoring is a financial transaction where a business sells its accounts receivable (invoices) to a third party (a factor) at a discount to obtain immediate cash.


How does factoring improve cash flow?


Receivable Factoring provides immediate cash against your outstanding invoices, reducing the waiting period for customer payments and enhancing your cash flow for operational needs.


Is factoring considered a loan?

No, factoring is not a loan. It is the purchase of your accounts receivable for immediate cash, so it doesn't add debt to your balance sheet.


What are the typical costs associated with factoring?

Costs for accounts receivable factoring can vary but typically range from 1% to 1.5% of the invoice value, depending on factors important to the accounts receivable financing company such as the volume of receivables and the creditworthiness of your customers.

Who can use factoring services?

Any business that issues invoices can use the services of factoring companies. It is suitable for businesses, from small enterprises to large corporations to use an accounts receivable factoring company to improve their cash flow.


Can start-ups or small businesses benefit from factoring?

Factoring is especially beneficial for start-ups and small businesses that need to stabilize cash flow and manage working capital when a business line of credit is not available and the factoring cash advance solution for unpaid invoices provides a working capital solution.
 

Does factoring affect my business's relationship with clients?

Factoring can be managed discreetly without impacting client relationships. It's essential to choose accounts receivable factoring companies with a good reputation reputable and respect client confidentiality.

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

Recourse factoring means the business must buy back any unpaid invoices from the factor, while non-recourse factoring does not require this, offering more risk protection.

How quickly can I get funds through factoring and how does accounts receivable factoring work on getting paid?

Funds are typically available almost immediately after the factor verifies the invoices, often the same day or within 24 to 48 hours.


What documents do I need to start factoring?


You must provide your invoices, proof of delivery for the goods or services billed, and possibly other documentation related to your customers and accounts receivable for a proper invoice factoring solution.



 

Click here for the business finance track record of 7 Park Avenue Financial