Factoring In Canada – What is the best rate?

Factoring In Canada - more firms are doing it and as this type of financing becomes more popular many business owners quickly discover they either do not know the rate they are paying, and in many cases are looking for a more competitive rate.

We are assuming in our share of information that you understand the basics of factoring – i.e. the sale of your receivables – It is most commonly used with high growth firms that cannot obtain he amount of traditional financing they need to grow; utilizing the working capital and cash flow derived from a factor facility.

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Stan Prokop is founder of 7 Park Avenue Financial - www.7parkavenuefinancial.com
Originating financing for Canadian companies,specializing in working capital, cash flow, and asset based financing , the 6 year old firm has completed in excess of 45 Million $ of financing for companies of all size . For info and free consultation on Canadian business financing and contact details see: http://www.7parkavenuefinancial.com/factoring_in_canada_working_capital_now.html

There are several key factors that influence your pricing on factoring – we would also point out that many customers refer to the factoring rate as a ‘ interest rate ‘ , while the industry itself does not position the cost of factoring asborrowing , or a loan, so therefore it is more commonly referred to as the discount rate . That is a small nuance but important for many business owners to understand.We recently met with a customer who felt his ‘rate ‘on factoring transactions was 3% / annum, when it fact it was closer to 24% per annum. Again, as we had said, the lender positions that 2% / month as a ‘discounting fee for their service.

What other factors are important in either determining if your factoring pricing is competitive, or simply to determine what your rate in fact is?Size and volume are also critical factors in your overall facility rate, and other factors include the credit quality of your customers. Also, the factoring industry in Canada is very fragmented – by that we mean that the actual factoring firms are in the following categories:

-Small and local

-Medium size and large – Canadian owned( few and far between)

-Branches of American and European firms where factoring originated and is more popular and well known as a alternative financing vehicle

So why is it important to understand how a firm is structured and who owns it? It is probably one of the least focused on areas when Canadian business owners or financial manager consider a factoring facility.They don’t necessarily care who they are dealing with, they just want a factoring facility.

What are then the differences between firms that can make your company a happy factoring client versus a dis-satisfied or uninformed client?

A solid advance rate in Canadian factoring is 90% - if your firm is not getting that amount of advance on each invoice we believe you do not have an optimally priced facility.Pricing in our opinion tends to be more aggressive if your firm has a monthly facility size of 250k – Facilities below this size tend to be higher priced and have less aggressive advance rates.The general overall quality of your receivables helps to determine final pricing.

So what is the range of discount rates in Canada – in our experience they are between 1- 4% per month? This is a huge range and only re-enforces the point that many firms do not understand where they may fit into the overall price positioning of the factor facility.

Finally, we would also point out that there are a number of miscellaneous fees that firms charge that significantly alter the final fee. These are buried deep in the body of term sheets and approval facilities, they seem nominal in nature, and add up to large differences in pricing.

Whats the best advice? Find an experienced, credible and trusted business financing advisor who can ascertain your optimal factoring facility relative to discount rate, terms, and structures.

Factoring in Canada – Working Capital Now

Factoring in Canada – as a Canadian business owner or financial manager you have heard of this type of financing but require more information in two areas:

-How does it work

-What does it cost

Naturally, even more important, is it right for your firm?Factoring in Canada is what we would call somewhat ‘fragmented’ as a business or industry. As a result many clients we meet either have entered into the wrong kind of factoring facilities, or simply don’t know where to go when they want more information. Because of that we encourage business people to enlist the aid of a trusted and experienced financing advisor in this area.

Unbeknownst to many people there are even banks in Canada, including some in the big 6 that offer this type of financing. We would position that offering as probably the best one in the industry, however ouroverall financing volumes must be very large and typically a facility would be at least in theone to two million dollar range, so that does not work for everyone .

When we refer to factoring we can make the statement it is in the general category of asset based financing – but it’s very specific in that in deals only with your account receivable.The basics of the factoring finance offering are that your receivables are purchased, as soon as you issue them, (if you wish). Legal ownership of the receivables is not longer your firms, but you have the immediate cash flow and working capital by virtue of having sold those receivables.

In our opinion 95% of the factoring in Canada involves the factor firms role in the billing and collection of your accounts – we don’t necessarily feel that is the best facility for the Canadian marketplace and encourage customers to initiate a facility whereby they get all the benefits of factoring from a financial perspective, but at the same time are able to bill and collect their own receivables. Most Canadian business owners are not looking for what we could call an ‘intrusive ‘financing facility that has their customers interacting with the factoring firm.

Canadian business probably does not realize that factoring, also otherwise known as invoice discounting, is used by thousands and thousands of firms in Canada. It has become more popular for a variety of reasons, one of them simply being that as it gets more difficult to obtain business credit in a challenging financial environment factoring itself offers total solutions to working capital and cash flow challenges. Another key point is that this type of financing has a broader appeal to companies that are either in start up phase, or growing very quickly and unable to access more traditional working capital.

A true feature of factoring is that it in effect provides you with unlimited working capital. By that we mean that if you have a traditional banking or term lending type facility it has caps and limits on it, including things such as covenants and other collateral. Since the underlying asset in factoring is just the account receivable, we can make the statement that if your receivables are continuing to grow you will always have the commensurate access to cash for all those receivables.

Most of the factoring in Canada is done on a recourse basis , so your firm ,or your factor partner, has to do some level of due diligence on your customers, although naturally every Canadian business should be doing that anyway . So if a receivable becomes uncollectible then you need to repay that amount that was advanced on that receivable.

In summary, if your Canadian firm is looking for a traditional factoring model and you don’t have concerns about your customers being notified of your factoring facility, this type of financing will suit you.

However, if you wish to maintain a total control of your billings, collections, and your interaction with our clients then consider a true working capital factoring facility – You will have all the funds you need, and your financing will not be transparent to your client based.That’s a great financing solution.

Purchase Order Financing - Canadian Solutions

Purchase Order Financing – Is it your solution to growth and working capital challenges? Canadian business owners and financial managers are always challenged when they are required to fulfill customer orders or new contracts where pre payment of a significant amount of goods is required to ultimately complete a large order or contract. Many times these new orders or contracts represent the potential start to a large relationship that has the ability to grow large revenues and profits for your Canadian firm.

Is there a solution? One that you might want to consider is purchase order financing. Under this type of financing, (also referred to as ‘P.O.Financing ‘) payment by the finance firm is made directly to your suppliers for your order or contract.

This allows you to complete the order, generate receivables from that order, and of course collect from your customer. The financing charge is typically in the 3% range, so there needs to be a clear indication that your firm has the gross margins to support an additional cost in the 3% range. Therefore firms with higher gross margins are great candidates for purchase order financing, and they are less so if they are in a low margin commodity type business. It’s all about the gross margin!

It is not hard to imagine why suppliers are asking for upfront payment. The typical reasons that we hear from our customers is that they:

- have exceeded the suppliers authorized credit limit for their firm
- the supplier is oversees and does not want to ship or commit capital to a firm in another country
- Your firm if new and has limited financial information or financial wherewithal to arrange financing of such magnitude

Remember also that your firm has what is known as a cash conversion cycle ( every firm has one ) There is a large of often 2-3 month from the time you receive orders, build and ship inventory or product, and then wait 30 days ( or longer!) to collect from your customer . Purchase order financing is a solid solution to your cash conversion cycle.

In putting together a purchase order financing facility we stress to clients that this is very much an alternative financing scenario, but it is clearly one that offers you a solution that traditional Canadian banking or lending would not offer.
Therefore your firm should be able to ensure that you can demonstrate the viability of your customer and that you can fulfill the order or contract.
One of the other advantages of purchase order financing is simply that from start to finish it can be set up in approximately 14-21 business days, assuming your full co operation on applications forms, backup info, etc. Most Canadian business people recognize that financing of a certain size in a traditional banking or term lending environment might take significantly long to complete.
In summary, purchase order financing is a unique niche within the area of business financing. If you are new, or not knowledgeable about this type of financing speak to a credible and experienced and trusted business advisor who will guide you through key areas of P.O. Financing including such things as minimum amounts that can be financed, credit application information, and the standard industry fees / rates.

SR&ED Financing – Why Wait For Your Cheque – Finance Your Claim Now

SR&ED financing is an incredible way of maximizing the whole Canadian SR&ED process in Canada.Of course Canadian business owners and financial managers can wait for their refund – there is certainly nothing wrong with that.

However, if you choose to finance your claim now you can in effect continue to maximize the overall potential of this great Canadian program. Funds can be used for immediate purchase of equipment, allowing you to maintain your competitive market position - an excellent strategy might be to use a portion of the fund as a down payment on a lease or purchase of equipment, thereby reducing your overall borrowing cost.

When we meet with business owners and financial managers one of the key questions we are always asked is how much money can be financed under a claim. That answer is that, in general, you can get 70% of your overall claim, which is, of course, the combination of both the federal and the provincial claims as a total.

Since the claim you are financing is a cash grant, and non repayable the financing you receive under a SR&ED tax credit financing is yours for any corporate purpose. So typically the funds are used for working capital, purchase of new equipment, and even the repayment of any Canada Revenue Agency (CRA) arrears that you might have if you are in the unfortunate case of owing government super priority payments such as GST, Source deductions, etc.

If you are in a position of financing two years of claim, which is the allowable backdating under the program, you can of course get immediate financing (FOR THE 70%)of the total of the two years claims . That can be very significant dollars in some cases. So as an example, you have filed a SR&ED claim for two years, the current fiscal year and your previous fiscal timeframe. Let’s say those two claims total $450,000.00 as an example. So over the last two years you have expended 450k, (probably much more) on research and development. You have had your claim prepared by a competent SR&ED consultant , and are now waiting for you technical and financial audit , which are standard during the SR&ED process .

So what is the option? As we stated it is a case of waiting, in our estimate between 3-12 months for your cheque, or, as we suggest for consideration, financing that claim now. Under of 70% rule you immediately obtain cash flow and working capital in the amount of $ 315,000.00 to use for general corporate purposes. When the claim is processed, approved and paid by the government you of course receive the balance of the 30% of the claim less financing costs. Financing costs are higher than normal business financing might be via your chartered bank, as in essence you are factoring a receivable that is due to your firm.

In order to ensure a solid and easier financing of your claim we again re state the fact that it is good to have your claim prepared by an experienced person in this area – which in some cases, but certainly not always, be your accountant or C.A. firm. We say ‘ not always ‘ because SR&ED claims preparation and analysis is very industry specific and is notwhat we would call a ‘ core competency ‘of every C.A. in Canada , and that’s an understatement !

In summary, it should probably go without saying that every Canadian firm should consider filing for their non- repayable SR&ED refund. If you choose not to wait for your government refund chq consider financing that claim now and making use of that valuable working capital for your cash flow needs. Speak to an experienced, credible, advisor in this area to initiate your claim financing.

Stan Prokop is founder of 7 Park Avenue Financial - www.7parkavenuefinancial.com
Originating financing for Canadian companies,specializing in working capital, cash flow, and asset based financing , the 6 year old firm has completed in excess of 45 Million $ of financing for companies of all size . For info and free consultation on Canadian business financing and contact details see: http://www.7parkavenuefinancial.com/SR_ED_Financing_3.html

Wanting me Back and Me ..

Its sometimes the story heading that totally catches your eye, I wish I was as creative sometimes - BNET title said ’ Those companies that laid you off - they want you back ’ ..

http://www.bnet.com/2403-13070_23-408970.html?tag=landing-pad&promo=713&tag=nl.e713

I worked for 3 Mega corporations for 25 years, and after I founded my own firm in 2004 I always wonder if I would ever go back to corporate - like many of us I have a feeling that if we ’ went back ’ we could easily find ourselves in the same predicament again - From 1980-1990 I worked for Digital Equipment - just an unbelievable great company and business story - their ads for employment in newspapers always said ’ For a career that should last a lifetime ’ .. Anyway, you know how that worked out ...

Stan

Film Tax Credit Financing – Working Capital for Canadian Productions

Canadian film tax credit financing is an important aspect of financing for film, multimedia and gaming industry in Canada. The Canadian federal and provincial governments seem to be maintaining, if not increasing tax credits to the industry.

Whether firms have U.S. or Canadian origins Canadian tax credit financing is a very valuable source of capital for entertainment content that is produced in Canada.

The overall stable financial environment in Canada compared with other sovereign locations help to promote both productions and the resultant tax credit schemes as sponsored by federal and provincial governments.

The bottom line is that tax credits from an overall perspective are both improving and increasing in the Canadian environment.

The Canadian tax credit environment is somewhat different from U.S. and other European countries which focus on pre-production, future values of the production, and the ancillary revenues associated with DVC, cable, television, etc.

Therefore in Canada tax credit film financing is not necessarily related to the projects ability to repay any lender with future cash flows generated from success of the project.

In Canada, based on the current tax credit structure of federal and provincial governments the financing of tax credit sis not dependant on commercial success. Naturally the ability to predict ‘commercial success ‘is in fact impossible, as evidenced by thousands of productions in entertainment history.

So how do Canadian productions get assistance with working capital and cash for for productions that have uncertainty of success?

The answer is simply to finance film, multimedia, digital and gaming tax credits via an independent third party, which in Canada’s case is either a Chartered bank or and independent finance firm .
All productions in Canada, in each of our aforementioned entertainment categories are financing in a limited number of ways - Owner equity, debt, financing tax credits, and actual government grants.
The whole area of why government is involved in such an area is for another discussion, but clearly appears to be because of the potential for employment.

If a production is able to obtain ‘Gap financing ‘then that is an alternative to tax credit financing. Simply explain Gap financing is a cash flow or mezzanine loan on territories and rights.
Film tax credit financing in Canada is a very valuable cash flow and working capital component of the industry. The financing is very ‘boutique’ in nature, with a limited number of players. We recommend you discuss or consult your film tax credit financing needs with an experienced advisor in this area.

Private Equity and Me ..

Interesting article today in the Financial Post - ’ Private Equity has its Place ’

The gist of the article is that contrary to popular belief Private Equity is alive and well -

My firm has worked with some private equity firms on transactions and would totally agree that these guys know what they are doing - they often have vertical markets and niches which they know exceptionally well and are very accurate at understanding value and potential .

My biggest problem with private equity in Canada is that medium sized firms in Canada are often considered too small for such investments, and many great companies cant get the financing they might need to grow their firms.

Stan