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INVOICE FACTORING & ONTARIO FACTORING COMPANIES & FACTORING SERVICES IN CANADA
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7 Park Avenue Financial
South Sheridan Executive Centre
2910 South Sheridan Way
Oakville, Ontario
L6J 7J8
ACCOUNTS RECEIVABLE FACTORING IN CANADA - YOUR GUIDE TO FACTORING RECEIVABLE FINANCING AND WHAT YOU NEED TO KNOW
"Cash is king, but accounts receivable is royalty." - Unknown
Receivable financing in Canada. Canadian business owners seem to have a major point of confusion around finance factoring and why this form of ' financial engineering ' differs from bank financing. Let's find out why. Let's dig in!
WHY CONSIDER INVOICE FACTORING FINANCING / INVOICE DISCOUNTING?
Growing your product sales/service and profits is job # 1! When businesses grow they need cash. Your small business cash inflows are tied up in a valuable asset - accounts receivable waiting to receive a cash payment from clients, and suppliers who want to ship your product.
UNLOCK THE SECRET TO CASH FLOW TODAY
Start accessing these funds through custom-tailored financing solutions from accounts receivable financing companies for fast funding via 7 Park Avenue Financial so we can help make sure all of your funding needs are met without adversely affecting your company's operations or other business loans that are in place.
A/R FINANCING IS SHORT TERM FUNDING FOR YOUR OPERATING NEEDS
An A/R finance strategy is not tied to long-term financing via debt. That, in general, is a good thing, and it delivers constant recurring cash flow and working capital needs for Canadian businesses as you generate sales and receive cash.
IT IS CRITICAL TO UNDERSTAND THE DIFFERENCE BETWEEN BANK FINANCING AND COMMERCIAL FACTORING SERVICES
At the core of understanding the A/R financing process via factoring is the need to understand the difference between ' assigning ' and ' selling.' When you finance your A/R through traditional bank loans and financial institutions such as a credit union, you provide them with an assignment of your book debts, i.e. your receivable base.
UNDERSTANDING FACTORING RECEIVABLE FINANCING
In finance factoring from a third-party financial company, the paperwork around your transaction revolves around the general credit strength of your company's customers ( credit checks are sometimes performed ) and the actual sale of the receivable as you finance them via factoring companies. The total amount advanced against a/r when factors buy your financial rights in an invoice is always more than a bank typical 75%
ADVANTAGES OF A/R FINANCING IN CANADA - WHO USES FACTORING RECEIVABLE FINANCE SOLUTIONS
What are some of the key advantages of invoice financing utilizing a commercial third-party finance firm vs. a bank? They might include:
Constant availability of a positive cash balance as you generate sales- The company selling its receivables will occur typically within 24 hours of invoicing get paid! Factoring providers have an easy to obtain and very quick approval process around invoice payment
The ability to address seasonal bulges in financing needs via a factoring facility
A strong balance sheet relative to the amount of cash you have on hand
WHAT IS THE COST OF FINANCE FACTORING
When we talk to clients about those advantages, the one negative issue in their mind is the higher cost of this method of financing from a factoring company. Remember, though, this higher cost is what we could term a ' rising and falling ' issue.
5 KEY FACTORS AROUND RATE AND COSTS IN A/R FINANCE - MAKING THE RIGHT CHOICE FOR YOUR BUSINESS
1. The actual costs of factor finance from many factoring companies depend on several key factors
2. How fast you collect your accounts
3. The discount rate at which your sales are purchased,
4. The advance rate on your cash, which is typically 90% of your a/r balance. (Banks in Canada only advance or allow you to draw 75%) - that's more cash for your day-to-day needs. The remaining balance is in your reserve account, which is paid back to your firm when your client pays, less the ' factor fee' -i.e. the fee the factor takes - typically in the 1-2% range.
5. The invoice value of your accounts receivable is also a factor in your pricing relative to the average size and amount of your invoices and the given period they are outstanding. Good collections = more cash /lower funding fees!
All finance terms can vary depending on the variety of issues we have outlined above.
Finally, factoring charges are expressed as a factoring fee and not confused with an interest rate - a point often misunderstood.
SHORT TERM ' FACTORING LOANS ' VERSUS TERM LOANS
Remember also that we spoke of finance factoring as being a short-term day-to-day cash flow solution. Yes, the business owner/manager could, in fact, implement a ' permanent working capital solution, 'which might be a less expensive form of financing, but that typically brings debt to a balance sheet.
But when small businesses weigh the costs of borrowing a large sum for a term of typically 5 years at a fixed rate, you will see that the actual financing costs of a permanent bank term loan are, in fact, significant.
Using that example, the business owner or financial manager may well find that receivable financing is, in fact, a better strategy!
So it is very important to analyze the actual costs and benefits around either pledging (bank) or to factor (commercial finance firm) your accounts receivable base.
Your company also has the option of choosing recourse factoring or non-recourse factoring financing, allowing you, in the case of the latter, to transfer bad debt credit risk to the factoring company if there is a non-payment by your client. Invoice factoring for startups is always available as well.
CHECK OUT CONFIDENTIAL A/R FINANCING! THE BEST FACTORING SOLUTION?
Most factoring companies offer only traditional ' notification ' type factor solutions. If you use a confidential account receivable finance solution, you can also avoid any notification to your clients traditionally required by old-school finance factors who require third parties to be notified. Collecting payments remains in your control.
At 7 Park Avenue Financial, that is our recommended solution for a/r financing for outstanding invoices you wish to finance for short-term cash needs, solid advance rates, and no long-term contract by the way. That’s a key benefit! Talk to our team about business factoring and financing solutions. Get quick access to cash to keep your business moving forward.
DON'T GET CONFUSED BY THE TECHNICAL TERMS
At 7 Park Avenue Financial we find our competitors to do a good job of confusing clients with some of the technical terms in receivable finance - Here are some straightforward explanations of some of those terms
Lockbox - In certain forms of receivable finance payments for the company's accounts receivable are made into a secured account established via the financing company
Credit Insurance - businesses have the option of taking credit insurance that protects them against losses to due non-payment and bad debt
Factoring Line - A factoring line is similar to a business line of credit and identifies the total amount the factoring company will advance on the business's accounts receivables
Concentration - Some factoring companies are concerned about the amount of financing made available to one single customer when in some instances a large percentage of the company's sales are to one or just a few clients
Factoring Agreement- this is a financing agreement that spells out the terms and conditions around the receivable finance facility - The agreement will identify advance rates, fees, etc,
"In a tight economy, factoring can provide a quick source of cash flow to help companies stay afloat." - Tony Robbins
CONCLUSION - MAXIMIZE YOUR BUSINESS POTENTIAL BY FACTORING RECEIVABLE FINANCING
Seek out and speak to 7 Park Avenue Financial, a trusted, credible and experienced Canadian business financing advisor who can assist you with your financing engineering around cash flow and working capital and asset based loan solutions.
FAQ: FREQUENTLY ASKED QUESTIONS
What is factoring finance?
Factoring finance for small businesses is a type of business financing often used by small and medium-sized businesses to meet immediate cash flow needs. Using these financing methods a company sells its invoices (e.g., unpaid customer bills) at a discount for an advance on future payments from those customers without waiting until they are paid in full or have been collected themselves directly -
The actual credit history of your firm is less important than the quality of your client base if your customer pays reasonably well to terms. Invoice financing for growth and expansion is available to any Canadian business selling on trade credit terms to other businesses. Trucking companies and staffing agencies are large users of receivable finance.
The transaction makes it easier for sellers to access funds now rather than wait months before collecting their receivables through regular channels.
What is invoice factoring/debt factoring?
Factoring is an alternative form of financing and is a financial transaction ideally suited to small and medium-sized businesses, especially enterprises that do not have a long and established banking record with a major lender.
Factoring is an innovative way for your business to access funds tied up in accounts receivable through cash flowing your sales immediately. You generate revenues without any obligation to do so if funds are not needed for a specific invoice
Why choose 7 Park Avenue Financial for your factoring needs?
7 Park Avenue Financial offers customized, flexible financing options and is an expert in working capital solutions. We will ensure you have a solid understanding of all available funding for your business and growth strategy priorities without hidden fees, etc. It's a true form of asset-based lending that strengthens your balance sheet, and your business incurs no debt.
Talk to the 7 Park Avenue Financial team about what your cash flow needs are directly related to day-to-day changes in cash needs and when cash reserves are low in your business cycle as specific industries have different funding needs. Find out how a factor provides the cash you need today
Who are the parties directly involved in a factoring transaction?
The three parties in a transaction involving invoice financing and factoring services via factor loans are the company selling its accounts receivables, the factor that purchases those receivables and finally, your customer.
What are the benefits of factoring receivable financing?
The benefits of factoring receivables include the ability of a business to improve cash flow and access funding immediately upon sales made to clients - This financing process improves cash flow and makes cash management more predictable. Companies using traditional notification factoring can utilize the credit risk services of a factoring company.
When a business uses receivable finance solutions such as debt factoring no debt comes on the balance sheet - the business is simply monetizing assets. Businesses that are unable to access traditional financing from banks and other financial institutions still qualify for factoring solutions. Using a/r finance solutions generates cash available to reinvest in the business and take advantage of prompt payment discounts from suppliers
What is the difference between recourse and non-recourse factoring?
The difference in recourse and non-recourse factoring facilities revolves around the amount of risk a company wishes to take in accounts receivable as it relates to bad debt and non-payment. Companies using recourse fatoring assume full credit risk for products and services they sell t clients - Non-recoures finance facilities transfer bad debt and collection non-pyament risk to the factoring company - This additional risk is priced into the factoring fee and is more expensive given the higher risk assumed by the finance company.
Businesses can also choose to offset credit risk by insuring accounts receivable via trade credit insurance.
What are the qualifications for factoring in receivable financing?
The qualification for a business to be successful in obtaining a factoring facility revolve around key actors such as the general overall creditworthiness of the client's accounts receivable. The age of invoices is also important, as invoices over 90 days old are not generally considered financeable . Factoring companies also look at overall facility size, invoice volumes and what industry the company is in.
Many firms such as freight companies and staffing and placement agencies are good client prospects for a factoring company, but any company selling on a b2b basis can access factoring solutions, While the client a/r quality for unpaid invoices is the main focus a company must also be generally financially stable and not in a downward financial spiral, Companies should be able to demonstrate they can provide proper financial statements and a generally reasonable debt to equity ration, and accounts receivable agings with accurate invoice documentation for goods and services delivered.
What is the cost of factoring in receivable finance?
The cost of factoring in receivable finance for financing fees is determined by the accounts receivable financing business/company and is based on a number of factors including the overall size of average invoices and the creditworthiness within the accounts receivables of the business as it relates to how fast customers pay. Companies choosing non-recourse solutions that transfer bad debt risk to the finance company will pay more for that service compared to a traditional business loan bank arrangement, - Miscellaneous fees also must be taken into consideration and include a setup fee, ppsa search fee, etc, - A/R financing via factoring and accounts receivable firms is a more expensive solution than bank financing and typical rates from an accounts receivable financing company in Canada range from 8% per annum to .75% per month.
Selective receivables financing is also available for companies wishing to fund a specific or small amount of invoices - this is also known as ' spot factoring ' in the context of receivables financing.
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