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Beyond Banks: The Rise of Invoice Factoring Companies in Canada
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Invoice Factoring Companies: Your Path to Factoring Receivables | 7 Park Avenue Financial
From Stress to Success: How Invoice Factoring Companies Transform Businesses
INTRODUCTION
Working with experts is preferred in any aspect of business or personal life. When considering alternative financing options like invoice factoring for accounts receivable, seeking the guidance of a trusted and experienced business advisor is recommended.
Invoice Factoring in Canada:
Factoring, also known as receivable discounting or financing, is a rapidly growing method of business financing in North America, including Canada. It's used by various businesses, from startups to established companies, that might face challenges accessing traditional financing.
Invoice factoring refers to the invoice finance solution in which a business "sells" a portion or all of its unpaid invoices to a third party. This method enhances cash flow and revenue consistency within the company. The factoring firm pays most of the invoiced amount upfront and then collects the payment directly from the business's customers.
Invoice Factoring Example: Here is an example of how invoice factoring works!
- Outstanding Receivable Amount: $100,000
- Advance Rate on the Receivable: 90%
- Factoring Rate: 1% per month
- Collection Period: 45 days
Step 1: Calculate the advance amount using the 90% advance rate on the $100,000 invoice.
- 90% of $100,000 = $90,000
The factoring company would pay your business $90,000 immediately.
Step 2: Determine the factoring fee for 45 days, given the rate of 1% per month.
- 1% for the first 30 days = 1% of $100,000 = $1,000
- For the additional 15 days, you would calculate an additional 15/30 * 1% = 0.5% of $100,000 = $500
The total factoring fee for 45 days would be:
- $1,000 + $500 = $1,500
Step 3: When the factoring company collects the payment from your customer pays after 45 days, they will remit the remaining balance to you, minus their fee:
- Remaining 10% of invoice: $10,000
- Minus the factoring fee: $1,500
The amount remitted to you:
- $10,000 - $1,500 = $8,500
So, the overall amount received by your company through the factoring process would be:
- Initial advance: $90,000
- Amount remitted after collection: $8,500
Total: $98,500
In summary, by factoring a $100,000 receivable with a 90% advance rate and a 1% per month factoring rate/factoring fee, your company would receive $98,500, with the factoring company earning $1,500 for providing the service.
Businesses see that the factoring cost of invoice discounting allows them to immediately reinvest cash from receivables into further investments in their business, such as purchasing equipment, funding day-to-day operations, etc.
Accounts Receivable Financing - Your Working Capital Solution:
Invoice factoring is a crucial source of working capital and cash flow for businesses, mainly when dealing with high receivables and inventory levels. It's a versatile financing solution that works well both in challenging economic times and during periods of growth.
Challenges in Choosing a Factoring Company:
The challenge lies in understanding how invoice factoring companies' pricing, practices, and procedures work. Proper assessment of these factors for factoring services is essential to making the right choice and understanding and managing the payment terms in your accounts receivables.
LOOKING FOR THE BEST RECEIVABLE FACTORING SOLUTION TO IMPROVE CASH FLOW?
Confidential Receivable Financing, commonly called Non-Notification Factoring, is a specialized form of invoice factoring for ' selling unpaid invoices " that offers businesses a discreet and advantageous financial solution.
In this arrangement, while businesses still leverage their outstanding invoices to secure immediate working capital, they maintain control over their customer relationships and collections process. Unlike traditional factoring, where customers are notified of the arrangement and payments are collected by the factoring company, non-notification factoring operates confidentially.
Borrowers continue to manage their invoicing and collections internally without disclosing the factoring company's involvement. This approach ensures that the business maintains its established rapport with clients and preserves the confidentiality of the financial transaction.
The key benefit to the borrower lies in the ability to access capital while retaining a sense of normalcy in client interactions, maintaining control over collections, and safeguarding the business's reputation in the eyes of its customers.
Benefits of Receivable Financing:
The primary advantage of invoice factoring is the quick access to immediate payment via funds from the upfront cash advance as soon as an invoice is generated, assuming the invoice is legitimate and the related goods or services have been delivered.
Key Pricing Considerations:
Advance Rate: The amount you receive immediately into the business bank account after invoicing can vary between 75% and 90% for many independent factoring companies of the invoice value.
Discount Fee: Often confused with an interest rate, factoring fees charged by the factoring company are expressed as a discount rate. This is the cost of using their services.
Time to Pay: The time it takes for your customers to pay affects your financing costs. If your payment terms are 30 days, but customers pay in 60-90 days, your costs increase - Higher factoring fees are directly related to asset turnover and good a/r management on the company's outstanding invoices.
CONCLUSION
The decision of which factoring company to choose should be informed by the advice of a business financing expert.
Just like relying on accountants or lawyers, working with professionals in this field ensures that you understand how factoring benefits your specific business model and which factoring company aligns with your needs. The landscape of factoring companies in Canada is diverse, with Canadian and foreign-owned firms of varying sizes. Not all practices from other regions will work seamlessly in the Canadian context.
Small business owners know the importance of expert advice and careful consideration when selecting an invoice factoring company for business financing solutions.
Call 7 Park Avenue Financial, a trusted, credible, experienced Canadian business financing advisor who can assist you with your business finance needs. We've been helping small business owners / SMEs for over 20 years.
FAQ: FREQUENTLY ASKED QUESTIONS PEOPLE ALSO ASK MORE INFORMATION
Is invoice factoring the same as a business loan from a bank - Factoring vs Bank Financing
No, invoice factoring involves selling your outstanding invoices to a factoring company for immediate cash. It's not a loan or an unsecured business line from the bank, so you don't accumulate debt on the balance sheet when you cash flow an outstanding invoice from independent factoring companies under a factoring agreement.
Can startups with limited credit history benefit from invoice factoring
Absolutely! Startups often use invoice factoring to secure quick cash flow without relying on a solid credit history. The focus is on your customer's creditworthiness, and the factoring company pays your company the same day as an invoice is generated to clients. Companies choosing non recourse factoring finance can benefit because the factoring company assumes risk and bad debt.
Standard recourse factoring has the company continuing to maintain credit and collection risk in their client base. The best invoice factoring companies offer both types of financing. Small business owners can also utilize ' spot factoring ' to finance ' one of ' invoices.
Are there industries where invoice factoring might not be suitable?
While invoice factoring can be helpful to across various industries, businesses heavily reliant on one-time sales or consumer transactions might find it less applicable, as recurring invoices are a primary factor for most factoring companies.
How do invoice factoring companies determine the discount rate?
Discount rates for debt factoring/invoice financing for unpaid invoices are influenced by factors such as the industry, the volume of invoices, your customer's payment history, and the terms of your invoices. Discussing these details with a factoring company helps determine the rate and overall factoring costs.
Do factoring companies handle collections and customer interactions in accounts receivable factoring?
Yes, many factoring companies handle collections on your behalf. They communicate with your customers to collect payment. This can free up your time and resources for other business operations as the accounts receivable factoring company assumes and monitors collections.
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