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

A Receivables Financing Counterpunch – Making Factoring Cost Work For Your Company

How much is it? No we aren’t in line at a department store, we're sitting with our clients who are always asking what the true cost of factoring receivables is and if a receivables financing facility is their real solution for working capital problems. They ask other questions also, such as how the facility works and what is the best type of facility for the Canadian business marketplace, so we we'll cover those off also .

We don’t think there is more of a mis understood business financing in Canada, notwithstanding the fact that receivables financing is growing in popularity traction everyday. The biggest stigma around the topic is really the true cost, and we use the word true cost because many Canadian business owners and financials managers simply don’t understand the components of that true cost, and moreso, how these costs can be significantly offset and reduced.

We'll point out that coming up the rear fast and furious behind true cost are the issues of how the facility works and what type of facility is the best one in Canada - as there are several types.

To properly address our issue lets quickly define our subject - factoring, ( also called receivable discounting and invoice financing ) is simply the sale of your receivables to a third party firm, that firm providing you with immediate ( and we mean same day!) cash to finance your business

One of the misconceptions clients have around pricing is related to the fact that you receive (depending on who you are dealing with) 80-90% of your invoice amount in a receivables financing scenario. This must be taken into account when you are looking at total factoring cost.

One thing that constantly disturbs us is that the terminology mumbo jumbo that many factor firms use when they are offering you pricing on your facility. That’s why it makes total sense to talk to a trusted, credible, and experienced Canadian business financing advisor that will work with you through the (industry created) maze of factoring, factoring cost, and day to day paper flow.

You can quickly and easily focus in on the true cost of factoring by simply keeping in mind three things that you need to know - they are:
1. The percentage that you are advanced on your invoice (refer to our previous comments)
2. The discount rate charged on the advance
3. The length of time that you typically collect your receivables in

Most business owners are not readily facility with their DSO, their ' day’s sales outstanding '. You have to be, because it’s an ongoing measure of the time it takes to collect your receivables in days. It’s calculated simply by taking your receivalble on an annual basis, multiplying them by 365 (days) and then dividing that number by your sales for that time period.

Therefore, if you know your collection period, and get an honest, clear answer on our three points you can easily determine the cost of factoring.

Let’s give you a clear example: Your factor firm advances you 80% of your invoice. Their discount rate is 3%. So if you are in the lenders shoes your annual return on the client (that’s you!) is simply: Discount rate % times 365 days Divided by number of days invoice is outstanding.

In Canada that rate is typically going to work out to be in the 1.5-3% per month range depending on the lenders perception of the size and quality of your accounts receivable portfolio.

Is that expensive financing? You tell us, because if you take into account the receivables financing facility provides you with unlimited cash flow to generate sales and profits, and that you can use the cash to offset financing costs, well... we dont think so .Costs can be offset by using the funds to take supplier payment discounts, and purchase in larger volumes and better prices re your inventory needs, etc.

Speak to that trusted, credible business financing advisor we spoke of, he or she will guide you through the receivable discounting maze and set you on course with the right facility at a price that makes sense to you.

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http://www.7parkavenuefinancial.com/receivables_financing_factoring_cost.html