Mastering Factor Rates and AR Finance Pricing For Canadian Receivables Financing Strategies

We rarely meet a client who is comfortable enough to say they are a ' Master ' of AR financing pricing when it comes to receivables financing in Canada. Let's see if we can help you achieve some ' Master ' status

in this often confusing (but shouldn’t be) area of business financing in Canada.

So why is there a combination of mystery and clarity around using just your accounts receivable for cash flow and working capital financing. It's key to remember that when you look at this type of financing it's important to understand what is happening, shall we say ' beneath the transaction'. Because factoring/receivable financing in Canada is essentially the sale of you receivable and that's how it must be both recorded in your book keeping and accounting.

Let's get some of that ' boring' accounting out of the way quickly.

The entry is pretty basic - it’s a ' CREDIT ' to your receivables and a DEBIT (that’s an increase in your cash by the way) to your cash account. Mission accomplished!

Since your factor company / financing partner takes a discount fee for purchasing your receivables, either once, or on an ongoing basis you also have to take into account the financing charge, so that’s an additional entry as a DEBIT to your interest account .

One final entry, and we promise, it’s the last one, but when complete you will have now understood the actual mechanics of AR finance pricing. That entry involves the ' hold back ' since typically you receive only 90% of your invoices as cash as you generate them. The 10% is a hold back; - you receive that when your client pays, so you need to set up one final entry as ‘DUE FROM FINANCE FIRM '.

If we had to be honest (that’s our preference always!) we would have to say that our favorite/ recommended method of financing receivables is a Confidential Receivable Financing ‘arrangement - that is one in which your firm bills and collects your own receivables, with how you finance your business being your own business!

That type of arrangement still allows you to receive all the benefits of receivables finance:

Immediate cash on your sales generations
Balance sheet strength
Ability to take supplier discounts and achieve better vendor pricing

Etc!

Seek out and speak to a trusted, credible and experienced Canadian business financing advisor who can help you simplify Canadian receivable financing.

7 PARK AVENUE FINANCIAL
CANADIAN RECEIVABLE FACTORING 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 10 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/factor-rates-ar-finance-pricing-receivables.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


















Stan Prokop

Balancing the Cost of Canadian Receivable Financing With The Benefits . Making Sense Of Factor Rates And The Cost Of Factoring

Make the Cost Of A/R Financing in Canada Work For You – Not Against You !



Information on receivable financing and the cost of factoring cost associated with this method of financing . How do business owners in Canada measure factor rates with the benefits of this type of cash flow and working capital financing .





It's not that hard of a business question... ‘Would you pay more for something if you thought the benefits far exceeded the cost?’ That's the ' balancing act' we refer to when we talk to clients about receivable financing, and the factor rates that are associated with that type of financing.


Most business owners today have either heard about or perhaps even looked into factoring cost when they have investigated Canada's newest form of working capital and cash flow financing.

So they already understand the basics, simply that it’s a financing mechanism that allows you to efficiently sell your receivables, aka ' your sales' as you generate that revenue. You sell them at a discount (the ' discount ‘is what we are talking about today ) to obtain operating cash flow.

So it's clear that the actual amount and size of your receivables is key to the transaction, not necessarily your overall financial health. And again, as we explain to clients, this financing is not a loan; it’s a simple monetization of your current asset, the receivable.



Typically you can reduce and stay on top of financing cost when you are able to prepare regular monthly financials, understand your cash flow ins and outs, and have a sense of what financial projections are relative to cash flow planning.

So, let’s get into the essence of our subject, factoring cost. We'll start by simply outlining the basics, which is knowing what your total A/R is, how much you wish to finance, and how this financing cost is tabulated.

The receivable financing industry in Canada calls the cost of this business a ' discount fee'. Customers tend to think of this as ' the rate '.

So how does this ' cost ' or ' rate' if you will, work? You are advanced a certain percentage of your invoices as you generate them. Typically in Canada this amount is 90%. Any invoices under 90 days old can be financed, and you should know that you can finance them whenever you want.

In Canada the rates for this type of financing run between 2-3%. A more typical rate for any deal in the 250k /mo area is 2%. Remember, that’s a discount that you sell your A/R under. In the simplest of terms you get cash today for 98% of your sale. Business owners can see that it sure is better to have a decent gross margin if you are going to give up that 2% in profits to generate cash flow.

Factors that affect your actual pricing are typically the ones that confuse clients the most. They include the ' holdback' rate we spoke of, i.e. the 10% that is held back on each invoice and remitted back to you when your client pays.

The largest factor in receivable financing factoring cost is the time it takes your customer to pay. Ensure that you fully understand the ' per diem' or daily cost of every day your client doesn’t pay. A great strategy is to finance your quicker paying customers if you can.

Miscellaneous fees are levied by many of the factoring firms in Canada. This has been a real ' bugaboo ' with us, as these fees can add up and increase you’re financing cost. Make sure you know what they are, and try and negotiate them down or out of your agreement.

Our recommended facility is the confidential invoice financing working capital facility. It allows you to bill and collect your own receivables without any notice to clients, suppliers, etc. And the cost of that? It should be the same if you are dealing with the right firm and advisor.

Daily mechanics, who you are dealing with, and reading the fine print tend to be a challenge for the business owner or financial manager that simply wants to run their business. Speak to a trusted, credible and experienced Canadian business financing advisor for assistance in understanding receivable finance costs.




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/receivable_financing_factor_cost_factoring_rates.html