Tweet
Is Commercial Receivable Financing & Factoring the Rock Star Of Alternative Finance? We Think So & Here's Why!
Information on commercial factoring receivable financing in Canada. You need to know the cost and benefits of this type of alternative financing to augment cash flow & working capital needs
The sale of these accounts receivable causes two occurrences, a profit for the factoring company, (generally between 1-2%) and immediate cash for your firm, which is the seller and owner of the receivables your firm has generated.
In Canada we feel the main challenge for the acceptance of this strategy is the entire concept of who collects the receivable, i.e. your firm which sold the product or service, or the factoring company. The Canadian business marketplace has been somewhat slower to accept commercial factoring as a true traditional business financing strategy because of the optics of who collects the receivable. In years gone by it were only ‘financially troubled’ firms that utilized this strategy. That has clearly changed and factoring of various types is utilized by small start ups to some of Canada’s major corporations.
When we meet with clients who are considering a receivable financing working capital facility it is very easy to explain the immediate benefits - these of course include working capital and cash flow generation. However the type of facility you enter into, what firm you work with, and how this facility works on a day to day basis is really the essence of the key points that we focus on when a client contemplates this type of financing.
The ‘cost ‘of factoring should be a key discussion point in contemplation of such a financing. Unless you are a large already very credit worthy corporation your factoring costs will range from 1-2% per month. Factors that should take into account are the length of time that your customers take to pay yourself, and your ability to sustain the additional financing costs. There is a bottom line here, and that is simply hat you should have sufficient gross margin on your product or service that allows you to bear these additional costs.
Customers think of these costs as the ‘ interest rate ‘ on the transaction – this is really not valid because commercial factoring is not a debt financing per se, it is simply the liquidating of your receivables at an agreed upon discount . At the end of the day whether it’s perceived as a ‘ rate ‘ or a ‘ discount ‘ it still needs to be build into your profitability and cash flows budgets .
Is commercial factoring and receivable financing a recommended strategy? It is if you can immediately benefit from cash flow and working capital. It makes even more sense when you can utilized those funds (often received the same day as you invoice) to take advantages of supplier discounts and improved purchasing power. We have known some customers that have gained 100% cash flow benefits by immediate sale of their receivable, while at the same time utilizing those funds to reduce almost all of their discount factor fees. That’s true cash flow power.
Is there a bottom line? It’s simply that you should investigate commercial factoring, determine which benefits might work for you – while at the same time assessing costs and how the facility will work on a day to day basis. If it makes sense at that point work with a trusted, credible and experienced advisor to implement this relatively new cash flow solution for Canadian business .
7 Park Avenue Financial :
2910 South Sheridan Way
Suite 301
Oakville, Ontario
L6J 7J8
Office = 905 829 2653
Business financing for Canadian Firms , specializing in working capital, cash flow, asset based financing , Equipment Leasing , franchise finance and Cdn. Tax Credit Finance . Founded 2004 - Completed in excess of 100 Million $ of financing for Canadian corporations .
Stan has had a successful career with some of the world’s largest and most successful corporations.
Prior to founding 7 Park Avenue Financial in 2004 his employers over the last 25 years were, ASHLAND OIL, ( 1977-1980) DIGITAL EQUIPMENT CORPORATION, ( 1980-1990) ) CABLE & WIRELESS PLC,( 1991 -1993) ) AND HEWLETT PACKARD ( 1994-2004 ) He is an expert in Canadian Business Financing.
Stan has over 40 years of business and finance executive experience. He has been recognized as a credit/financial executive for three of the largest technology companies in the world; Hewlett-Packard, Digital Equipment and Cable & Wireless. Stan has had in depth, hands on experience in assessing and evaluating thousands of companies that are seeking financing and expansion. He has been instrumental in helping many companies progress through every phase of financing, mergers & acquisitions, sales and marketing and human resources. Stan has worked with startups and public corporations and has many times established the financial wherewithal of organizations before approving millions of dollars of financing facilities and instruments on behalf of his employers.
Stan Prokop
