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A New Look At Factoring Pricing In Canada
Does the cost of factoring finance, i.e. AR rates for funding receivables really have to be a ' hot potato ‘? We don't think so, and here is why.
THE ACTUAL COST OF ' FACTORING RECEIVABLES ' IS A FEE - NOT AN INTEREST RATE
The cost to finance a receivable via invoice factoring of course revolves around the ongoing sale of your A/R at a discount. That discount is essentially the core of our cost perception issue. Factoring fees are often very misunderstood and confused with interest rates.
Otherwise, things are pretty much the same, meaning that in the ordinary course of business you are still responsible for collecting your accounts in a timely manner, and furthermore, in a worst-case scenario, the customer’s inability or refusal to pay your firm still incurs a bad debt for your company. So far so good, right? We should mention that you can get what is known as non- recourse AR finance, but that is obviously a bit more expensive and essentially tied to the concept of credit insurance.
HOW DOES A FACTORING COMPANY ASSESS YOUR TRANSACTION
A Finance factor firm is going to look at hopefully the same issues that you look at when you enter into extending credit into your clients - i.e. client references, credit limits, collection history, etc. That's just Business 101 and the reason why large corporations invest hundreds of thousands/millions of dollars into credit and collection departments that will ultimately drive the company’s cash flow and operational results for sales and collections.
2 KEY BENEFITS OF AR FINANCE
Benchmarked against the costs of funding receivables are of course the benefits. The key benefit is pretty obvious; your firm receives cash essentially the same day as you make your sales. You're now in a position to do something that many of your competitors may not be able to do, and that’s to offer terms and credit limits to many of your clients that even your competition might not be able to do.
Second benefit. It's virtually unlimited credit to your firm - you're not going cap in hand to apply or renew Canadian chartered bank lines.
THE TRUE COST OF FACTORING YOUR ACCOUNTS RECEIVABLE
So let's get down to the nitty-gritty . The cost of receivable finance. The key point we want to make today is simply that many Canadian business owners and financial managers don't really understand the true cost of what they are paying already, even when they are not factoring. Let’s look at our key example today:
EXAMPLE OF THE COST TO FACTOR A RECEIVABLE
Let's say your firm has a made a $10,000.00 sale and has generated an invoice for your client. Let’s say the customer is very late and pays you in 100 days. If we assume your company can borrow money at today’s rates in the 6% range as an example the cost to carry that receivable, i.e. just wait! is approx. $160.00.
What we have just demonstrated is what is known as the cost to carry a receivable. If your firm had a receivables funding factor facility in place a typical cost to fund that receivable for a 60 day period might be 300.00. With that new found cash that you have obtained immediately, you are in a position to take supplier discounts, buy more inventory, generate another sale, and make more profits.
Doing nothing and just waiting for a client to pay, carrying your clients, is obviously not a great thing.
FACTORS THAT DETERMINE OF OVERALL A/R FINANCING RATES
Generally in Canada factors that determine your AR rates and cost of factoring are your sales volumes, average invoice balances, number of clients, and general perception of creditworthiness of your clients and your industry.
IS CONFIDENTIAL RECEIVABLE FINANCING THE BEST AR FINANCE SOLUTION
At 7 Park Avenue Financial Our recommended solution is confidential factoring, which allows you to reap all the benefits we have hopefully noted, with your firm being in control of billing and collections - i.e. no third party involvement.
Speak to a trusted, credible and experienced Canadian business financing advisor who can assist you with your financial needs when it comes to receivables funding.
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Oakville, Ontario
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7 Park Avenue Financial provides value-added financing consultation for small and medium-sized businesses in the areas of cash flow, working capital, and debt financing.
Business financing for Canadian firms, specializing in working capital, cash flow, asset based financing, Equipment Leasing, franchise finance and Cdn. Tax Credit Finance. Founded 2004 - Completed in excess of 100 Million $ of financing for Canadian corporations.
Stan has had a successful career with some of the world’s largest and most successful corporations. He is an experienced
business financing consultant
.Prior to founding 7 Park Avenue Financial in 2004 his employers over the last 25 years were, ASHLAND OIL, ( 1977-1980) DIGITAL EQUIPMENT CORPORATION, ( 1980-1990) ) CABLE & WIRELESS PLC,( 1991 -1993) ) AND HEWLETT PACKARD ( 1994-2004 ) He is an expert in Canadian Business Financing.
Stan has over 40 years of business and financing experience. He has been recognized as a credit/financial executive for three of the largest technology companies in the world; Hewlett-Packard, Digital Equipment and Cable & Wireless. Stan has had in-depth, hands-on experience in assessing and evaluating thousands of companies that are seeking financing and expansion. He has been instrumental in helping many companies progress through every phase of financing, mergers & acquisitions, sales and marketing and human resources. Stan has worked with startups and public corporations and has many times established the financial wherewithal of organizations before approving millions of dollars of financing facilities and instruments on behalf of his employers.
Click here for the business finance track record of 7 Park Avenue Financial
Stan Prokop
7 Park Avenue Financial/Copyright/2020
