Factoring finance in Canada continues to get strong positive traction as a financing tool for Canadian business. In fact, and we see more of this everyday, a once alternative financing vehicle with negative connotations is now a mainstream form of business financing in Canada with positive connotations!
So what changed that, and what is the one mistake Canadian business owners and financial manager make when entering into a factoring program.
Well first of all, what changed is very clearly too all Canadian business owners, financing has become a major challenge for funding future growth and profits. Therefore all forms of business financing should be considered by every business owner and financial manager.
Let’s get back to the subject of our article – what is the single biggest mistake you can make when considering a factoring facility. The answer is:
Entering into a factoring program without understanding how it works and the limitations of the program! That’s a broad comment so let’s get right into what mistakes clients make when we sit down with them and work towards a solid factoring and working capital facility that makes sense for their firm.
First of all, you should not consider factoring as a ‘loan ‘per se. Also, it’s not the same as how a Canadian chartered bank would run such a facility, if your firm was eligible for bank financing. When you enter into a factoring program you are selling your receivables – however under a true bank arrangement you are collateralizing your receivables and borrowing against them. That’s a big difference.
So, clients ask, if we are selling our receivables, how much do we get? Well the reality is that is one of the major mistakes uninformed clients make when they enter into such a facility. Some firms in the marketplace will hold back part of the receivables they fund, but your pricing will be based on the total sale of the receivable or the group of receivables you are financing. Also, whats the cost of factoring?
Most clients make the mistake of focusing totally on price when it comes to factoring – yes that’s important , but at the same time, the way your facility is structured and how it operates on a day to day basis can be many times more important that ‘ price .
Speaking of price the reality is that most customer equate price in receivable financing as an annual interest rate. The industry actually does not view it this way, preferring to call the sale of the receivable a ‘discount ‘to its original value.
We can talk all day about that one, but if you are in fact focused on price you need to understand the per diem rate you are paying everyday that receivable is uncollected. How that rate is communicated to you, and when the rate terminate on collection is one of the single most expensive errors you can omit to research when working on a receivables financing facility.
In summary, our boy scout motto of ‘be prepared ‘is highly appropriate to a factoring financing program. Work with a trusted, credible and experienced advisor who can guide you through the technical maze of factoring to ensure you side step our warning around entering into a facility that is not properly priced or explained to your firm with respect to overall cash flow impact and day to day dealings on your receivables . After all, your receivables are more often than not your largest financial asset – doesn’t it make sense to understand what type of financing you place around this asset? We think it does.
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