Turning Receivables into Cash: Exploring Debt Factoring

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Boost Your Business Cash Flow with Accounts Receivable Financing

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EMAIL - sprokop@7parkavenuefinancial.com

7 Park Avenue Financial
South Sheridan Executive Centre
2910 South Sheridan Way
Oakville, Ontario
L6J 7J8

 

Debt Factoring Financing Via Business Factor Companies | 7 Park Avenue Financial

 

Boost Your Business Cash Flow with Debt Factoring

 

 

Understanding Debt Factoring and Business Factor Companies in Canada

 

Introduction

For Canadian business borrowers looking for financing, understanding the intricacies of debt factoring becomes essential.

 

Often misinterpreted, this financial mechanism provides firms with a seamless way to generate cash flow without accumulating additional debt. Let's dig into the landscape of debt factoring/invoice factoring and financing in Canada and its relevance to businesses.

 

What Is Debt Factoring

 

Debt factoring is a financial tool that empowers businesses to access the cash in their unpaid invoices without waiting for extended credit terms.

 

Here's how it works: Businesses sell their accounts receivable to a third-party entity, known as a factor, at a discounted rate. In return, they receive immediate payment. The traditional a/r financing way this happens is that the finance firm takes responsibility for collecting the invoice when it matures, ultimately paying the seller the remaining balance after deducting fees. NOTE - Under non-notification a/r financing clients and bill and collect their own invoices, while still receiving all the benefits of financing receivables.

 

Debt factoring offers valuable benefits, especially for small and emerging businesses. It helps stabilize cash flow, ensuring they meet their regular financial obligations. This, in turn, enables businesses to maintain their operations smoothly while also establishing and preserving their credibility and reputation in the market.

 

Debt factoring provides businesses with the means to:

 

• Accelerate cash conversion cycles, leading to faster business cycles.
• Streamline receivables management and credit control tasks, reducing time and effort.
• Enhance business planning and forecasting accuracy thanks to consistent and predictable cash flows.

 

Does Factoring Serve as a Cash Flow Lifeline?

Business factor companies in Canada present their services as a cash flow lifeline. But the question remains: Does debt factoring, often called "receivable financing," truly serve its purpose?

Unveiling Debt Factoring

In finance, factoring is a transaction wherein companies receive cash in exchange for their sales invoices. Canadian businesses can expedite cash flow by "selling" these receivables to a factoring company. Whether a one-time transaction or a recurring one, factoring allows firms the flexibility to choose when and what they want to finance, ensuring strict obligations do not bind them.

Debunking the Misconception: Debt Factoring Isn't Debt!

Contrary to its name, factoring isn't a loan. Businesses aren't piling on debt; they're monetizing sales. Most Canadian factoring services operate on a recourse basis, which means that while companies can generate immediate cash, they're still responsible for collecting the owed amount from their customers. Time plays a pivotal role in this, with prompt collection benefiting the business significantly.

Decoding the Cost of Factoring

Understanding the cost structure of factoring is crucial and is often viewed as one of the disadvantages of debt factoring in Canada compared to bank financing  - It is important to understand basic terms such as :

    The Advance Rate - The percentage of the invoice amount financed.
    The Fee - A percentage deducted as the finance company's profit.
    Time - Duration for which the invoice remains outstanding until customers pay

Factoring becomes a formidable financing option for a business with reputable clients and undisputed invoices. Firms typically receive up to 90% of their invoice's value upfront, with the remaining balance (minus the factoring fee) being remitted upon the client's payment.

But remember, the finance company's profit is directly linked to the invoice's outstanding duration. This is why efficient accounts receivable management becomes paramount in invoice management and the focus on improved cash flow - The key is a focus on asset turnover!!

Choosing the Right Facility

For many businesses, a confidential A/R finance facility strikes the right balance. It allows firms to finance their sales while retaining control over billing and collection processes.

 

Confidential Receivable Financing -  Disclosed and non-disclosed A/R Financing

 

Disclosed factoring is commonly known as notified factoring. As the name implies, the seller will notify the buyers about the engagement of the factoring firm and instruct them to pay the invoice directly to the factor on the due date.

 

The seller does not disclose the factor's involvement in non-disclosed factoring arrangements. As a result, it is also known as a confidential factoring deal.

Conclusion

The unparalleled advantage of debt factoring lies in its ability to consistently churn out cash flow as businesses roll out their products and services. Meeting everyday obligations becomes easier, propelling growth without the burden of carrying the investment of heavy accounts receivable.

However, it's imperative to understand the associated costs. With financing fees ranging between .75 -1.5% from invoice factoring companies, businesses need solid gross margins to bear these factoring fees comfortably. Contrary to popular belief, these are fees, not interest rates.

At 7 Park Avenue Financial, we know numerous business owners grapple with cash flow and working capital management.

Debt factoring provides a respite, ensuring day-to-day operations run smoothly. Talk to the 7 Park Avenue Financial team,  seasoned  Canadian business financing advisors ready to bring you the right financial solution. We guide businesses towards effective debt factoring strategies, a bridge to more traditional financing avenues.

 

 FAQ 

 

What is cash flow debt factoring, and how does debt factoring work?

Debt factoring, or accounts receivable factoring, is a financial strategy where a business sells its outstanding invoices to a third-party invoice factoring company (factor) at a discount. This provides immediate cash flow, allowing the business to meet its financial needs via funding from the third party factoring company.

 

What are the benefits of invoice factoring services/invoice discounting for businesses?

Debt factoring offers benefits such as improved cash flow, reduced credit risk, faster access to funds, and the ability to focus on core business operations instead of chasing unpaid invoices.

 

How do business factor companies help with working capital management?

Business factor companies purchase a business's accounts receivables, injecting cash into the company. This cash can be used to pay suppliers, cover operating expenses, and invest in growth opportunities, optimizing working capital.

 

Are there different types of debt factoring?

Yes, there are two primary types of debt factoring: recourse and non-recourse factoring. Recourse factoring requires the business to buy back uncollectible invoices, while non-recourse factoring protects against bad debt.

Recourse Factoring:

• The factor doesn't assume credit risk or customer default risk.
• Customer defaults, factor seeks recourse from the client.
• Factor manages the sales ledger, but the client bears credit risk.

Non-Recourse Factoring:

• The factor takes on credit risk and offers additional services.
• Even if the customer defaults, the factor can't be recovered from the client.
• Higher fees due to bearing the risk of non-payment.

 

• Non-recourse factoring typically has higher pricing when the factoring company assumes the risk

 

How can a business choose the right factor company?

Choosing the right factor company involves evaluating factors like fees, terms, reputation, and industry expertise. Finding a partner that aligns with your business's specific needs and goals is crucial.

 

 

What is the typical cost structure of a factor company's services?

A debt factoring company will charge a fee based on the invoice value and the time it takes to collect payment. These fees can vary, so it's essential to understand the terms before partnering with a commercial factor company.

 

Can factor companies work with businesses in all industries?

While many factor companies serve various industries, some specialize in specific sectors. Finding a factor company familiar with your industry's unique needs is essential. Trucking companies and personnel agencies are two industries that utilize a/r financing solutions.

 

What alternatives are there to debt factoring for business financing?

Alternatives to debt factoring companies include traditional bank loans, lines of credit, venture capital, and angel investors or small business loans that are working capital oriented, such as merchant cash advances. Each option has advantages and disadvantages, depending on the business's circumstances.

 

 

Do factor companies handle debt collection and customer interactions?

Yes, factoring companies often take on the responsibility of collecting customer payments. This can benefit businesses that want to offload the burden of chasing unpaid invoices as the debt factoring company takes control of collection practices

 

Can businesses use debt factoring service as a long-term financing solution?

 

Invoice financing is typically used as a short-term solution to address immediate cash flow needs. Businesses looking for long-term financing may explore options like equity or traditional loans.

 

What Is Supplier Guarantee Factoring?

• Also known as 'drop shipment factoring,' 'vendor guarantee factoring,' or 'supply chain factoring.'
• Involves three parties: the borrower, the factoring company, and the borrower's supplier.
• Factor guarantees payment to the supplier when the borrower's buyer accepts goods.
• Funds from factored invoices go directly to the supplier from the client's future receivables.
• Factor deducts fees, remitting the profit to the client.
• Factor plays a dual role: supplier payment guarantee and factoring service provider.
• Enables businesses to pursue new opportunities by securing credit from suppliers, previously unavailable

Receivable Financing In Canada : How To Use AR Factoring Finance To Your Firms Benefit

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What's All The Commotion About A/R Finance In Canada ?

Information on factoring and receivable financing in Canada. A/R Finance and debt factoring play key roles in the cash flow of thousands of Canadian businesses just like yours - Here's why

Canadian business owners and financials managers continually are hearing about factoring in Canada. It is difficult to separate the information Canadian firms need to know from the ‘noise ‘and misconceptions about Canadian factoring and receivable financing .

At no time in recent history have Canadian businesses been challenged with obtaining the acceptable amount of capital they need to run and grow their businesses. The cash flow shortage can often be the death knell of a company, as it has the ability at that point to go into a long term death spiral, ultimately ending in potential business failure.

All business owners can recognize they have limitations in generating capital and cash flow for their firm. The usual cast of characters includes, of course:

Bank Financing of current assets

Canadian Government working capital term loans

Owner equity

Asset sale and leaseback strategies

So, as we have noted, with all the commotion and market noise about ‘ factoring ‘ how does the business owner in Canada understand how this financing works , what is the upside and downside, and most importantly, is it right for your business .

In Canada factoring, also known as ‘invoice factoring ‘mirrors the U.S. method of doing business. Your company in effect ‘sells ‘its accounts receivable at point of invoicing, with your company and your factor partner determining who will bear the ultimate risk of non collection of the receivable. If you bear the risk its called ‘recourse ‘– if the finance firm bears the risk it is called non-recourse. Many factor firms insert a third scenario into the above mix; they require the receivables to be insured, which adds an additional layer of expense for your firm, generally in the 1-2% range. However there is of course solid comfort in knowing that the receivable is in fact insured and that no bad debt expense will come back to your firm!

Business owners need to understand that the receivables you are in effect ‘selling ‘for immediate cash are current, valid, and earned receivables. Your firm has to have delivered the product or service, your customer should have accepted that same product or service, and the invoice must be ‘due ‘per your payment terms. Generally you are in no position to sell a receivable and expect to receive cash for that sale if the invoice is greater than 90 days old, as there is some doubt as to the ultimate collection of that account.

So let’s also get back to the ‘noise and commotion’ in the Canadian business financing marketplace about this alternative method of financing. What’s the good and bad from your perspective as the Canadian business owner.

First of all you are, to some degree, out of the collection business. The factor firm now does that. We can almost hear you breathing a sigh of relief – but remember that one of your most valuable assets, your customer relationship, is now partially in the hands of a third party finance company. To eliminate such issues we are a huge proponent of CONFIDENTIAL RECEIVABLE FINANCING .

So what’s the bottom line – it’s of course to ‘pick your partner ‘carefully. We recommend that you use a trusted, credible and experienced Canadian business Financing Advisor with a track record of success
in this alternative financing method, allowing you to reap maximum benefits from this relatively new form of Canadian business financing.



Stan Prokop - founder of 7 Park Avenue Financial –
Originating business financing for Canadian companies , specializing in working capital, cash flow, asset based financing . In business 10 years - Completed in excess of 100 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 & Contact Details :

http://www.7parkavenuefinancial.com

7 Park Avenue Financial
South Sheridan Executive Centre
2910 South Sheridan Way
Suite 301
Oakville, Ontario
L6J 7J8

Direct Line = 416 319 5769

Office = 905 829 2653


Email = sprokop@7parkavenuefinancial.com

' Canadian Business Financing with the intelligent use of experience '

ABOUT THE AUTHOR
Stan has had a successful career with some of the world’s largest and most successful corporations.
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 finance executive 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.


Stan Prokop

Alternative Financing Solutions In Canada : Working Capital & Debt Factoring Solutions

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Mind The Gap ! That's The Working Capital Gap by the way !

Information on working capital financing . Alternative financing solutions such as debt factoring provide timely and valuable cash flow

for your business





Canadian firms who sell on credit terms to their customers (that's almost everyone!) require an appropriate amount of financing vis a vis the investment they carry in accounts receivable and inventory .Although the Canadian business owner and financial manager likes to think their firm sells on thirty day terms they of course have the hard reality of continually trying to sell receivables that are 60 and 90 days old.

The classic 'working capital 'gap is a huge challenge for most small and medium sized firms in Canada.

Enter factoring or receivable financing, a k a receivable discounting. This type of financing often becomes the alternative to the Canadian firm that is unable to generate the full amount of bank financing they require for operating lines of credit.

Factoring is of course the alternative to that 'operating line of credit. That type of facility allows you to pay suppliers, employees, etc while you wait for your receivables to be collected. Your receivables are in essence pledged as the collateral for the operating line of credit, or, in our case the factoring facility.

We need to also understand of course that the reason the firm cannot generate a bank facility is the requirements of the bank necessitate strong balance sheets, solid operating efficiencies, and profits and cash flows. Many businesses have challenges in some of those key areas that the bank focuses on.

So, is there a better solution to factoring as we have posed in our article title? The best solution is a true working capital facility of asset based lending facility. This is a non bank facility but operates in much the same manner as the margined bank facility. The facility allows your firm to meet payroll and supplier commitments and is significantly easier to arrange.

One of the main disadvantages of factoring, as perceived by Canadian business owners, is the intrusion that factoring can make into your customer based. Pure factoring along the lines of what is practiced in the United States involves notification to your customers, collection calls by a third party to your customer, etc.

A true asset based line of credit, which we call a 'non - notification' facility, has no level of customer intrusion. Yes this type of facility, similar to factoring, is more expensive than bank financing, but it removes much of the stigma that Canadian business owners associate when they hear the word factoring. It's Confidential!

The Canadian market place if very segmented in factoring, receivable financing, and true asset based lines of credit lending. Companies are best served to align themselves with a true business financing and working capital expert who can ensure the optimal facility is originated for your company on your behalf .Working with a trusted financing will ensure you have the optimal rates, structure, and day to day working capital facility that meet your cash flow financing needs.

If you're looking to ' fix the gap ' seek out and speak to a trusted, credible and experienced Canadian business Financing Advisor with a track record of success
who can assist you with your alternative financing and cash flow needs.


Stan Prokop - founder of 7 Park Avenue Financial –


Originating business financing for Canadian companies , specializing in working capital, cash flow, asset based financing . In business 10 years - Completed in excess of 100 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 & Contact Details :
http://www.7parkavenuefinancial.com


7 Park Avenue Financial

South Sheridan Executive Centre
2910 South Sheridan Way
Suite 301
Oakville, Ontario
L6J 7J8

Direct Line = 416 319 5769

Office = 905 829 2653

Email = sprokop@7parkavenuefinancial.com


' Canadian Business Financing with the intelligent use of experience '


ABOUT THE AUTHOR
Stan has had a successful career with some of the world’s largest and most successful corporations.
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 finance executive 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.


Stan Prokop

Afraid Of Debt Factoring? Business Factor Companies Actually Offer You A Lifeline On Cash Flow And Working Capital !

Something Different in Cash Flow Financing ?


OVERVIEW – Information on debt factoring in Canada . How business factor companies work . Which one is best for your firm?




Debt factoring is a bit of a misnomer here because when you deal with a business factor company you are actually not incurring any debt... but we can't stop clients from calling things what they want to!


Business factor companies in Canada often maintain they offer your firm a ‘lifeline '

when it comes to cash flow generation. Does debt factoring, aka ' receivable financing ' really work, and if so... how!

Any company that sells on credit and has receivables can generation faster cash flow via factoring. The actual process could not be simpler - it's either a one time or ongoing sale of your A/R as you generate sales. Some advantages are that you can finance what you what, and when you want. If you have signed up for the right facility you are under no obligation to finance all your sales, just the amounts you need under your facility.

As we said, factoring is not a ' loan ' per se. That's where the misnomer lies, in that you are not creating or adding any debt to the balance sheet, you are simply monetizing sales, as you make them!

In general most facilities of this type in Canada are on a recourse basis, simply meaning that your firm is still responsible for the overall risks in collecting the receivable, and collecting it in a timely fashion. Since the main component of factoring pricing is ' time ' you benefit significantly by financing and then focusing on collecting those receivables. Large corporations maintain that focus... you should also.

Factoring pricing is widely misunderstood in Canada. The three parts of the pricing of receivable finance are as follows -

The advance rate
The fee
Time

If you're dealing with the right firm you usually are able to obtain 90% advances on your receivables. The ten per cent becomes a hold back that is remitted to you promptly after your client pays. Discount rates are 1.5-2% on financing. That means that the finance firm will deduct that fee as their profit on every invoice based on a typical 30 day collection period.

And as we said that final component is simply how long the receivable is outstanding? So focus on collecting those sales!

Do we have a recommended type of facility? In general the best suited facility for your firm is a confidential A/R finance facility. Here you are financing your sales and at the same time maintaining the right to bill and collect our own A/R.

Speak to a trusted, credible and experienced Canadian business financing advisor who can ensure you are getting proper debt factoring finance.






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/debt-factoring-business_factor_companies.html



7 Park Avenue Financial
South Sheridan Executive Centre
2910 South Sheridan Way
Suite 301
Oakville, Ontario
L6J 7J8
Phone = 905 829 2653
Fax = 905 829 2653
Email = sprokop@7parkavenuefinancial.com