Clients who are in the process of investigating factoring financing want to know their receivable investment is being financed in the best manner possible. So... are factoring firms different - oh boy - you dont believe how different they are.
Let's examine some of the key issues around factoring and receivable financing in Canada - lets look at what the best type of facility is (in our opinion at least!), how the financing works, and most importantly, why you should consider using it.
Let's address the last issue first, namely why you should be using, or at least considering factoring financing. The reality is that your business is in one of several categories - they might be as follows: you are unable to unable to obtain traditional bank type financing; your business is growing at an exceptionally fast rate to support bank financing approval, your firm has financial challenges re operating losses and other issues.
So how do you choose among the many factoring firms out there in the Canadian environment? This is where it gets tricky, and you will save probably thousands of dollars when it comes to working with the factoring firms that make sense for your needs.
Here's the basic ' lay of the land' in a nutshell. Canada has hundreds, and we mean hundreds of factoring firms that come in all shapes and sizes, small local boutique operations, branches of U.S. and U.K. firms, and everything in between. We recommend a Canadian receivable financing firm that is local to understanding your needs, and one that offers confidential invoice factoring, which by far in our opinion, is the best type of A/R financing.
As most Canadian business owners and financial managers know invoice discounting, aka factoring is simply the sale of your receivables, on a one of, or entire basis, for immediate cash. Sounds simple and sounds great, right. It is, but the type of facility you choose and what you pay can make or break your decision to finance your A/R investment.
Costs of financing your A/R with factoring firms differ greatly - Generally you can be expected to pay between 1-3% per month based on a few key issues such as the size of your A/R investment, the industry you are in, and your receivable turnover, or DSO as its known in the business.
We strongly recommend clients search for a confidential invoice discounting facility - by far the best. Your firm retains all the advantages of factoring financing, but bills and collects your own receivables, receiving cash instantly as you invoice. This facility compares to the other 99.9% of the industry which uses a cumbersome system that involves notification to your customers around your financing arrangements.
There isn’t a day when we aren’t asked by clients about the cost of factoring, which is perceived as high by many clients. We can assure you that yes, it is higher than bank financing, but ask your bank if they will give you an unlimited line of credit based on your receivables . Keep us posted on that one, because we thing you know the answer already.
Also, if you used receivable factoring prudently you could actually in many cases achieve the same costs as you have in bank type lines of credit, but that’s a subject for another day.
Unsure of how factoring finance works - lets cover it off then! You invoice you client for work or services or product done/shipped, etc. You receive the same day, cash flow wired into your bank for that invoice or invoices. Typically 90% is advanced same day, the other 10% is a buffer , held back and remitted to you when your client pays, less the factoring costs themselves .
So whats our bottom line then - we think we can sum it up as follows. There are different types of factoring - we maintain confidential invoice factoring works best. Cost vary between firms and you should ensure you work with a trusted , credible and experienced Canadian business financing advisor to get the facility that makes most sense financially for your company .
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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 50 Million $$ of financing for Canadian corporations .Info re: Canadian business financing & contact details :
http://www.7parkavenuefinancial.com/factoring_financing_receivable_factoring_firms.html
