Mystery Solved . A/R Financing Pricing explained .. finally!
Information on the cost of factoring in Canada . How the receivable finance company prices your facility and what you need to do to control and benefit from this pricing
One of the mysteries of Business financing in Canada would appear to be the cost of factoring receivables from a Receivable Finance Company. Should this issue be as mysterious as the search for UFO’s or Bigfoot?
We don’t think so, so let’s explain.
Most business owners and financial manager who consider this method of financing their sales know the very basics - the fact that factoring is simply entering into an arrangement with a receivable finance firm that allows you to monetize or cash flow sales, as you make them . Simple enough, right?
Only a very small handful of issues come into play when you are financing your firm in this manner. The trick though, is your management... and understanding of them! That's where you quickly become a winner or a loser, and we're all for winning. And all of that should not, we repeat, should not be a mystery to you or your firm.
So those issues? They are as follows - you need to negotiate and understand the concept of the ' advance rate ' which is simply the percentage of funds that you advanced when you generate sales invoices. Typically in Canada that should be in the 90% range... your financing is definitely costing more if you are not getting a solid advance rate. In general the quality of your customer base determines that advance rate, but quite frankly some receivable finance companies have a policy or practice of lowering advances to you to increase their profits. So watch out for that one!
In general most factoring in Canada is done on a ' recourse ' basis, which simply means that you are responsible to cover any bad debts. You were anyway, so the only way to avoid this is by getting a facility in place which includes credit insurance. Naturally this is a bit more expensive, but we are always pleasantly surprised at the generally low cost of A/R insurance.
Opportunity cost is a concept that is pretty well always ignored by the majority of businesses who are entering into this type of finance. Why? Simply because there is not direct cost associated with it. but boy is it important for you to understand. That's because your ability to monetize sales over and over again , generating cash on your sale immediately leads to higher profits and better asset turnover, both key concepts that should be considered in your overall cost of finance .
There are usually some modest admin expenses when it comes to entering into this type of facility. These are nominal and should be understood, but hopefully should not be unreasonable enough to sway your decision to embrace factoring in Canada. But, as we said, make sure you know some of those admin fees.
Don't forget also that just because you don't finance your A/R via factoring that you aren't bearing a large cost already. That's because whether you are self financing or in fact have a bank facility you are carrying your clients for 30, 60... even 90 days these days, forcing you to absorb the major cost of financing your A/R.
Who controls one of the major factors inherent in receivable finance? You do! That’s because, for example, that if you are collecting your money in 30 days, as your terms state the cost of financing a $ 100,000.00 invoice is $1500.00 if you have a medium sized facility in place. That seems quite reasonable to us, given that factoring generates all that cash immediately allowing you to almost COMPLETELY! offset your financing cost by taking a supplier discount with your new found cash, negotiating better pricing for goods, or simply selling more by re investing in new sales and larger contracts.
So, the cost of factoring in Canada. Is there a mystery to it? Because of the way many present it there sure is .. but there shouldn’t be. Seek out and speak to a trusted credible and experienced Canadian business financing advisor who can assist you with a receivable finance company solution... that works!
Stan Prokop
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 10 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/cost-factoring-receivable-finance-company.html
CANADIAN RECEIVABLE FINANCE SOLUTION EXPERTISE
7 Park Avenue Financial
South Sheridan Executive Centre
2910 South Sheridan Way
Suite 301
Oakville, Ontario
L6J 7J8
Phone = 905 829 2653
Fax = 905 829 2653
Email = sprokop@7parkavenuefinancial.com
