Understanding Receivable Finance Cost In Canada
OVERVIEW – Information on the costs of business receivables funding , i.e. the cost of factoring funding in Canada . Here’s the right way to look at things.
Most of us recall that iconic ' You can't handle the truth ..' movie moment , and it seems appropriate to us that comment is pretty typical of explaining to clients the costs of business receivable funding in Canada . It can be confusing and complex ... but it should not be!
The cost of factoring in the Canadian marketplace revolves a lot around the terminology used by the industry to educate (or confuse) the Canadian business owner and financial manager.
Part of the confusion results simply, as usual, around misunderstanding the terminology. The receivable finance industry works on a ' discount ' basis, and that is often confused with an implicit interest rate.
In Canada typically the discount rate that your receivables are purchased/ financed typically is in the 2% range. Sometimes more, sometimes less, but for today’s purposes let's use a 2% example.
A number of different factors can influence that rate, some can be influenced by the customer, and others are simply as they are. They include:
Who you are dealing with
The type of receivables funding you are looking for - i.e. recourse/ non recourse, credit insured, confidential facility - We strongly recommend confidential invoice financing to clients, allowing them to bill and collect their own receivables.
The overall credit quality of your company and your receivables- Companies with a strong credit quality receivable base are more appealing than higher risk receivables
The type of industry your firm is in - as an example firms in the construction industry are difficult to finance or factor simply because their receivables are sometimes subject to disputes and even construction liens - In 2008 and 2009 the auto industry was extremely out of favor . Financing a General Motors receivable was actually... difficult. My how things have changed in a few years! but that is business, right?
The size and number of invoices your firm might have on a daily basis. Although its 100% achievable to finance a receivables portfolio made up of numerous small invoices this obviously requires more work and administration from your chosen finance partner
Set up and legal fees - A Business Receivables Funding arrangement is the same as any other business financing arrangement and has associated legal documentation and set up fees involved. These are typically quire nominal in the scheme of things though.
The majority of the confusion around the cost of factoring in Canada revolves around that fact that clients take the actual discount rate, in our example 2% and equate that to a financing rate. They quickly multiply that by 12 months a year and feel they are being charged a very high ' interest rate '.
That is somewhat of a poor way to look at it. Why? Let's illustrate by example. Your suppliers offer you, more often than not, a 2% discount rate to pay their invoice early. You could use the logic that your supplier is losing over 72% per annum for allowing you to pay promptly. Yes, your supplier has basically kind of self factored the invoice you have from them.
Bottom line, you have to view the cost of factoring as a price for using funding, not an implicit interest rate
There are many benefits to business receivables funding in Canada as a solid alternative to accelerate cash flow, grow your company, etc.
Speak to a trusted, credible and experienced Canadian business financing advisor who can assist you with your financing needs and clarify the true cost of factoring in Canada.
CANADIAN BUSINESS RECEIVABLES FUNDING EXPERTISE
Stan Prokop - founder of 7 Park Avenue Financial –
http://www.7parkavenuefinancial.com
Originating business financing for Canadian companies , specializing in working capital, cash flow, asset based financing . In business 7 years - has completed in excess of 80 Million $$ of financing for Canadian corporations . Core competancies include receivables financing, asset based lending, working capital, equipment finance, franchise finance and tax credit financing.
Info re: Canadian business financing & contact details :
http://www.7parkavenuefinancial.com/cost_of_factoring_business_receivables_funding.html
