A/R Financing: Boost Your Cash Flow Today
AR Financing - Canada
Introduction
Funding receivables can turn invoices due in 30, 60, or 90 days into working capital now—but an unsuitable facility can leave you paying for cash you cannot fully use.
Drawing on experience helping Canadian businesses structure trade receivables based financing, 7 Park Avenue Financial explains how to compare advances, eligibility rules, security requirements, and total costs before committing.
Receivable Financing Services are among the most popular working capital and cash flow alternatives today for Canadian businesses.
Receivables company solutions are a solid alternative to the Canadian chartered bank offering - the ‘business line of credit '. Let’s dig in.
WHY A/R FINANCING IS ESSENTIAL FOR BUSINESS GROWTH
Accounts receivable financing is a financing solution that allows businesses to leverage their outstanding invoices to access immediate cash flow. A/R Finance is a game-changer for companies struggling with cash flow, helping them fund day-to-day needs and seize growth opportunities.
Talk to 7 Park Avenue Financial about why this method of business financing can help your business.
HOW ACCOUNTS RECEIVABLE FINANCING WORKS
Once approved for account receivable funding, unpaid invoices can be submitted immediately for funding advances. The provider may finance up to 90% of the invoice's face value and hold the remaining as a holdback until the client pays. Once the customer pays, the provider will refund the balance to your business, minus factoring costs.
DOES ACCESS TO BANK FINANCING PROVIDE YOU WITH THE FUNDING YOU NEED TO RUN AND GROW YOUR BUSINESS
It’s not hard to see why business owners/financial managers are mesmerized by the lure of bank facilities - they are low-cost and have some solid flexibility.
The problem? Getting approved! Essentially, it comes down to the credit standards our banks set. An accounts receivable loan can be a viable alternative to traditional bank financing, providing cash in advance based on outstanding invoices and offering financial flexibility.
THE DIFFERENCE BETWEEN AR FINANCING AND AR FACTORING
Sometimes, people mistake accounts receivable financing for accounts receivable factoring, or invoice remittance factoring.
These two seem identical, but they have separate financial arrangements. It varies from invoice to invoice if you are using a different invoice.
Accounts receivable factoring involves a factoring service that pays a percentage of invoices in full before collecting payments from the customer. With AR financing, your accounts remain part of the ARportfolio, but you can use them as collateral to obtain an unsecured loan.
ACCOUNT RECEIVABLE FINANCING FILLS THE CASH FLOW GAP
A receivables company finance solution might be the ‘ buried treasure ‘ owners/managers seek.
These commercial firms fill the ‘ need gap, ‘albeit at a higher cost. Accounts receivable financing companies provide these services and can be a valuable business resource. The key collateral is the company's business assets, specifically A/R.
Receivable Finance, aka ‘ factor financing ‘ - it’s not ‘ equity ‘ or ‘debt’ financing; it’s simply monetizing your sales for the business lifeblood - cash flow.
HOW CAN YOUR COMPANY OFFSET INVOICE FACTORING COSTS?
Financing costs for accounts receivables financing vary widely and are typically in the 1.25 - 2% per month on outstanding invoices that you choose to finance off your balance sheet.
These costs are outlined in the accounts receivable financing agreement between the business and the financing company. You have just changed your company’s balance sheet into a cash flow machine.
These costs, though, can genuinely be significantly offset in several ways -
-
Your business can negotiate better pricing on products and services because of newfound cash availability from the factoring company
-
The business can now afford to take valuable supplier discounts for prompt payment, which themselves are often 2%!
-
Less sophisticated owners do not always consider the actual cost to ‘ carry a/r.’
-
Larger commercial or govt contracts can be taken on with the knowledge sales can be financed, thereby generating additional profit for your business - receivable financing accounting is easy to implement
In our experience meeting and talking to clients, the actual ‘needs’ of the business become blurred, as the business owner/manager often co-mingles other needs such as equipment, property, and inventory.
The best way to view A/R solutions is as a combination of short-term operating needs and a way to get paid early.
Which Funding Structure Fits Your Business?
| Structure | How it works | Best suited to |
|---|---|---|
| Factoring | Selected or all invoices are sold to a factor | Businesses needing fast, transaction-based funding |
| Invoice discounting | Advances are made against invoices, often confidentially | Established businesses wanting to retain collection control |
| AR line of credit | A revolving loan is supported by an eligible receivables borrowing base | Businesses with larger, consistent receivable portfolios |
| Asset-based lending | Receivables may be combined with inventory and equipment | Companies needing a broader working-capital facility |
| Non-recourse factoring | The factor assumes defined customer credit risks | Businesses concerned about approved customer insolvency |
| Selective factoring | Only chosen invoices or customers are funded | Businesses with occasional or contract-specific gaps |
ADVANTAGES OF ACCOUNTS RECEIVABLE FINANCING
A commercial invoice factoring facility has distinct advantages. One of them is borrowing power, as typical advances are 90% of outstanding A/R, significantly better than the bank's 75% ratio.
Accounts receivable financing provides immediate cash flow and operational flexibility by allowing businesses to submit invoices for funding and receive a percentage of the invoice's face value.
The best use of a facility is to have an ongoing facility based on the ebb and flow of sales and A/R collections.
Other solutions might be worth investigating. One is Revenue-based finance, which allocates a portion of all sales as the borrowing base.
In the smaller end of the market, i.e., small businesses and retailers/restaurants, ‘ Merchant Advance ‘ solutions are popular. They monetize future sales today and act as lines of credit in a way—some business owners refer to them as receivables loans.
Top experts will tell you that the best use of non-bank commercial financing is for business growth—in most cases, it is the ‘ bridge ‘ back to traditional financing, and common timeframes for utilizing this type of service are a year or two.
OUR RECOMMENDED BEST RECEIVABLE FINANCING COMPANIES / FACTORING SOLUTION
One of the best A/R factoring solutions is ‘CONFIDENTIAL RECEIVABLE FINANCE, ‘which allows you to bill and collect your own invoices without notifying others—least of all your competitors.
Additionally, receivable loans are another option for businesses looking to improve cash flow.
Case Study - Receivables Finance
From The 7 Park Avenue Financial Client Files
Company: ABC Company — a commercial furniture manufacturer in Ontario
Challenge: ABC Company landed its largest contract to date — a multi-location office fit-out — with a customer requiring 75-day payment terms. Production and material costs came due weeks before payment would arrive, and the company's bank line was already committed to existing operations.
How We Got There: 7 Park Avenue Financial structured a receivables funding facility sized to the new contract specifically, advancing against invoices as they were issued rather than requiring a blanket change to the company's existing banking relationship.
Results: ABC Company fulfilled the contract on schedule, kept its bank line untouched for normal operations, and used the facility as a bridge until the customer relationship matured to standard 30-day terms. A/R Finance is a trade finance method businesses can use - receivables financign is based on the size quality of your a/r
KEY TAKEAWAYS - INVOICE FINANCING FOR WORKING CAPITAL
-
Invoice Financing: Businesses sell unpaid invoices to a lender at a discount to get immediate cash.
-
Receivables Factoring: A financing method where a business sells its accounts receivable to a third party at a discount to obtain cash.
-
Cash Flow Management: Utilizing AR Financing to maintain a steady cash flow, ensuring operational expenses and growth opportunities are met.
-
Working Capital Loans: Short-term loans aimed at financing the day-to-day operations of a business.
-
Invoice Discounting: A financial product where businesses use their invoices as collateral to receive a loan from a lender.
-
AR Financing Payment Process: In AR Financing, the business retains ownership of the invoices and is responsible for collecting payment when the customer pays their invoice.
CONCLUSION - RECEIVABLES FINANCE
If you believe account receivable factoring companies are the solution, then financing accounts receivables is your cash flow solution.
It allows companies to fund day-to-day operations and is easy to access.
If you want to explore a Receivables company's potential cash flow power, call 7 Park Avenue Financial, a trusted, credible and experienced Canadian business financing advisor who can assist you with your working capital needs.
Financing accounts receivable can help businesses fund day-to-day operations and improve cash flow by borrowing against outstanding invoices or selling them to a third party at a discount.
7 Park Avenue Financial originates receivables funding
FAQ/FREQUENTLY ASKED QUESTIONS
How does AR Financing work?
AR Financing allows businesses to use their outstanding invoices as collateral to secure immediate funds, improving cash flow and operational efficiency.
How does accounts receivable financing work?
Accounts receivable financing allows a company to use its unpaid invoices as collateral for a type of loan. The lender advances a percentage of the invoice value, and fees, percentage calculations, and annual percentage rates (APRs) are involved in the process.
What are the benefits of AR Financing?
The main benefits include quick access to cash, improved cash flow, no need for additional collateral, and the ability to effectively handle operational expenses and growth initiatives.
Who can benefit from AR Financing?
Any business with outstanding invoices and needing immediate working capital can benefit, especially those experiencing cash flow challenges.
How is AR Financing different from a traditional loan?
Unlike traditional loans, AR Financing doesn’t require long approval processes or additional collateral. It’s based on the value of your outstanding invoices.
What are the costs associated with AR Financing?
Costs can vary but typically include a fee for the financing service, which is a percentage of the invoice value. Compare providers to find the best rates.
What is invoice factoring?
Invoice factoring involves selling your accounts receivable to a third party at a discount to get immediate cash.
How can small businesses improve cash flow?
Small businesses can improve cash flow through AR Financing, better inventory management, and negotiating favourable payment terms with suppliers.
What is the difference between AR Financing and factoring?
AR Financing involves using invoices as collateral for a loan, while factoring consists in selling the invoices outright to a third party.
How does invoice discounting work?
Invoice discounting lets businesses use invoices as collateral to receive a loan from a lender while keeping control of their sales ledger.
What are working capital loans?
Working capital loans are short-term loans designed to cover the day-to-day operational expenses of a business, ensuring smooth operations and growth.
Statistics
- Canadian SMEs face an estimated $36 billion in outstanding receivables at any given time Invensis
- 82% of business failures are linked to poor cash flow management, with slow-paying customers a primary factor Invensis
- Factoring advances typically fund in 24 to 48 hours versus 30 to 90 days for traditional bank credit approvals Research And Markets
- Advance rates in Canadian facilities typically run 75% to 90% of eligible receivable face value Research And Markets
- Canadian factoring volumes have grown 8-12% annually, outpacing traditional commercial lending growth of 3-4% Medium
Citations
