What is the Factor Cost Of Factoring Accounts Receivable?

Canadian business owners and financials managers who are considering financing accounts receivable often ask us how they can calculate , or moreso, understand the factor cost of factoring accounts receivable .

There are a whole bunch of factors ( excuse the pun ) that seem to be coming together to make the financing of accounts receivable a high growth , popular, and accepted method of business financing in Canada . The reality is that even just a few years ago most business owners did not even realize that they could sell their accounts receivable to a private non bank firm, gaining valuable working capital, i.e. cash flow! in the process .

Business is being driven to this method of Canadian business financing out of a very basic need - meet payrolls, make fixed term obligations, and purchase products and services. And when your customers make you wait, 30, 60, and unfortunately 90 days for your funds all of a sudden factoring, also known as invoice discounting and receivable financing becomes very popular. Not hard to understand.

Business owners want to know more about factoring and receivable financing simply because they recognize that cash flow challenges hinder them from growing, and yes, even surviving. And, we are sorry to say, many clients simply can’t get the bank financing they need to fund and grow their business - that isn't necessarily a condemnation of Canadian chartered banks, it’s a case of individual financing challenges within the current credit crunch and global economic challenges.

So, let’s cover off what you need and want to know about factor cost and the true way in which you should be looking at the pricing around factoring accounts receivable in Canada.

There are three; lets call them ' drivers ' in the pricing process of financing your receivables. Those three drivers are the time in which it takes for your invoice to be paid, and we mean right down to the day. Secondly the factor firm calls their pricing a ' discount ' - so the actual discount rate they quote you becomes critical in your knowledge of understanding your true cost of financing A/R. And finally, to keep things simple we often explain to clients in initial discussion that they receive immediate cash for their receivables once they finance them, i.e. same day cash.

However the reality is that the industry advances a (significant) portion of your receivable le, the rest is a hold back. Typically this portion is 90%, but many firms calculate total financing not just on the holdback but the invoice amount.

When do I get the holdback? Ask clients. The answer is that they receive the holdback as soon as the actual invoice is paid.

We thing its clear that the discount rate, of the three key drivers we have mentioned is the most focused on by clients. Because the commercial receivable financing industry is not regulated firms charge what markets will bear.

In summary, understanding the returns of your commercial factor firm will better assist you in determining if this overall receivable financing strategy is for you. Speak to a trusted, credible and experience Canadian business financing advisor to better understand the benefits of this growing method of financing your company.

How To Finance Your Business With a SR ED SRED Tax Credit Secured Loan

Can you actually finance your Canadian business via the monetizing of a sred tax credit secured loan? Absolutely, positively... maybe. We say maybe because if you don’t have a SR&ED tax credit then it is of course not possible. However, if you participate in Canada's primary R&D tax credit program then you're potentially on your way to increased cash flow and working capital.

Recent articles in the Canadian business press have criticized the need for the government to even further increase these tax credits. Typically most Canadian business owners and financial managers think that the sred tax credit applies only to manufacturing, which is the farthest thing from the truth. A recent article in the Globe and Mail , one of Canada's premier business publications, stated clearly that firms in the resource, services and technology sector also participate vigorously in the program .

If your firm in fact innovates and spends money on R&D the last thing you can be criticized for is under investing in your future. Therefore monetizing your tax credit after it is filed (it can also be cash flowed prior to filing! in certain circumstances) makes great financial sense.

Is monetizing your tax flow credit risky in any sense of the word? Our clients hardly think so, as you are simply ' cash flowing ‘, or ' discounting' your claim today , and you are not even adding debt to your balance sheet . Think of the sred credit as a current asset, in fact it’s a receivable, and you are simply collateralizing a bridge loan against your sr&Ed claim.

SR&ED tax credits are more often than not prepared by an external consultant, although some firms choose to prepare the claim itself - we suspect it's because they think that they have a better handle on the nature of the claim. The reality is however that you gain an additional ' brownie point ' - if we can call it that by having the claim prepared by a professional sred consultant. Many firms in Canada aren’t aware that these consultants will even prepare your claim on a contingency basis - so if they are prepared to take the risk of time and expense on your claim you can quite rightly assume they feel it will be approved , as professional rarely choose to work for free!.

While the Globe and Mail survey indicated that 70% of Canadian business thought the tax credits currently in place were not as generous as they thought they should be , lets be honest and cant we agree that receiving 40-50% back of every dollar you spend on r&d isn’t that bad a start! And you if can turn your spent funds into instant cash flow by monetizing your claim doesn’t that give you a leg up on your competition . We certainly think so.

Cash for research tax credits is not a complicated process. A short overview is as follows - have your claim prepared in a manner that suits the government’s current filing process. File your calim with your tax return. Seek out a trusted, credible and experience business financing advisor who will work with you to complete a SRED financing application - it is not dissimilar to any other business financing application you have ever filled out. Include your sred claim as additional back up, as it is in effect the collateral for your sred loan. Claims can be financed in two to three weeks after some basic due diligence.

Financing sred puts you in line with other firms to get your share of the 3 Billion (yes that’s billion!) dollars of non repayable cash grants. Turning your claim into a cash infusion makes great sense if you are a small to medium sized firm with need for additional working capital.

Monetizing your claim will drive cash flow which will no doubt inspire your firm to further innovation.

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http://www.7parkavenuefinancial.com/sred_tax_credit_secured_loan.html

Using Film Tax Incentives For Television, Animation and Film Finance in Canada

Most of the players here in Canada as well as in the U.S. seem to agree that the film, television and digital animation business has bounced back nicely in Canada. Film tax incentives in film finance (we’re of course talking about television and animation projects also) continue to play a strategic role in the challenge of cobbling together a full and successful finance package for projects.

The financing of your project seems the opposite of the glamour and dare we say it ' sexiness ' of the film and TV industry. The challenge clearly is to maximize financing while minimizing risk to investors and owners and Canadian tax credit incentives do just that. When these tax c credits are financed, or ' monetized ' they in fact supercharge the working capital and cash flow of your production.

Many parts of a project financing have what the financial analysts call ' unpredictable revenue streams ' via foreign sales, DVD sales, and of coruse the box office itself.

Why not therefore make some of those ' unpredictable' future cash flows very predictable with money from federal and provincial governments in Canada. As you are certified and approved for your projects your ability to finance the credits in the private sector simply enhances your productions chance of overall success.

Financing your tax credits in Canada essentially has you putting together a hybrid of equity, debt and tax credit financing which, done properly, allow your project to success from a financial perspective. (We won’t get into the entertainment or public acceptance merit of your projects!)

Whether you are a car manufacturer or a film producer, director, owner it’s all about ROI, return on investment. Leveraging your project from a tax credit incentive simply enhances ROI.

Canadian entertainment projects in film, TV and digital animation are very much ' blossoming ‘.
Even though the Canadian dollar has grown stronger the enhanced credits that have come into place in the last year or so simply are driving U.S. and foreign productions into Canada. Even Bollywood is looking at Canada!

Maybe Canada is a little boring and conservative when it comes to many other countries but being a stable country with a diverse filming geography and strong financial system offsets that Canadian ' boring ' personna quite well!

Single productions cannot apply for both the domestic film/tv credit and the production services tax credit - you are required to choose one or the other assuming you qualify. In many cases applications are being streamlined and even filed online in Canada.

Speak to a trusted, credible and experience film fax advisor to maximize the financing of your tax credits - they should no doubt enhance project success.

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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 6 years - has completed in excess of 45 Million $$ of financing for Canadian corporations .Info re: Canadian business financing & contact details:
http://www.7parkavenuefinancial.com/film_tax_incentives_film_finance_tax_credit.html

Is There A Better Way To Finance A Business Loan ? Consider An Asset finance strategy.

When you need asset finance and a business loan in the 2010 economic environment alternatives are great. One of those solid alternatives is an asset based lending arrangement which focuses on what counts, your assets!

As a business owner and/or financial manager you are looking for business financing that makes sense. ABL is the acronym for one of the more exciting business financing alternatives that is growing in popularity every year in Canada. Are we actually saying that asset finance via an asset based line of credit is ' exciting '? We will let you decide that, but if this financing is easier to achieve than bank financing, is cost effective, and provides you with unlimited capital... well our clients are excited... you make your own thoughts on that !

Asset based lines of credit simply are drawn down by your firm based on the value of ongoing assets. The assets that are always there are inventory, A/R, and to some degree your fixed assets that aren’t already financed. By collateralizing your assets, and, most importantly, leveraging them to the max if you need to, you are creating available working capital.

We are always explaining to clients that this leverage of assets is not taking on debt, you are not borrowing on a long term basis, and you are simply monetizing current and fixed assets based on current values. What are those values, typically they are 90-100% of receivables under 90 days, 40-75% of your inventory, and a liquidation type value on any equipment you want to temporarily monetize. Clients always ask - ' Do you mean that we can borrow, if we need to, on a temporary but ongoing basis on our fixed assets?". The answer is yes, if you are considering this type of financing strategy.

Let’s cover off the two key points clients always tend to focus on when they are investigating this unique business loan strategy- namely costs, and timelines to get the working capital facility in place.

In some ways cost is the most difficult area of explanation and investigation in an asset finance working capital facility. Putting aside the normal due diligence or commitment fee required to get a facility in place the reality is that there are a couple of key drivers that affect pricing . Asset finance revolvers can be just as competitive as a Canadian chartered bank financing (and less onerous to get approved) but prices varies all over the board in Canada because of the fragmented and specialized nature of this type of financing.

Typically we see rates as low as 9% per annum and as high as 1.5% per month. That’s a big spread and ultimately it depends on the size of the facility, the mix of your current assets, as well as any perceived industry or business risk associated with your firm. But again, we remind the reader, what price would you pay for unlimited working capital?

Typically it takes 2-4 weeks to close such a facility. In Canada as we noted the market is fragmented and these lenders are very focused, specialized, and by nature experienced in what they do, which is value your assets and finance them!

Speak to a trusted, credible and experienced Canadian business financing advisor around asset finance as a business loan strategy if your working capital needs ' aren't working ' now!

Isn’t Working Capital Bad For Your ( Business) Health ?

We can hear our clients now! How possibly could working capital (isn’t that cash flow?) be bad for my firms financial health. Let’s talk about that.

The technical financial folks define working capital as a very basic calculation that even the non financial business owner can do - simply deduct your current liabilities from your current assets ( from your balance sheet statement) and, voila ! Congratulations, you have working capital. Hopefully that number is a positive number, because when it’s negative you're technically insolvent and that's a subject and solution for another day!

Anyway, our working capital number is positive - that’s good, right. Not necessarily, and that’s the premise of our info we share here , because if you have positive working capital your funds are tied up in receivables, inventories and pre paid items .

It is therefore very important to understand what makes up working capital, how you can monetize or cash flow it, and most importantly, but often totally overlooked , how you can measure business capital and working capital .

The essence of measuring your working capital revolves around turnover, days sales outstanding, inventory turns, and payables days outstanding.

The good news is that you can very easily calculate and track these measurements, and we can virtually guarantee they will better assist you to understand why your investment in working capital is very much a teeter totter of good news/bad news.

Do you like to travel? Money does also, and considers how long it takes for a dollar to travel through your company. From the day you place an order, purchase product, pay for product, bill a receivable, and yes, collect that receivable that total cycle can be easily 200 days, if note more. That’s a lot of travel, so you hopefully can see our premise here that your investment in your working capital accounts is not necessarily a great thing.

Your business is composed primarily of inventory, receivables, and payables, (also fixed assets). We therefore strongly suggest to clients that they understand the turnover and overall return they are getting from these key asset accounts.

You would understand your working capital situation somewhat better if it were not for those pesky issues that you can’t control - business owners and financial managers recognize them well and run into them every day. They are sales growth and decline, your fixed costs that you have to pay and manage no matter what, and any financial distress you may be experiencing from past external factors - i.e. a bad year, etc,

The holy grail of business capital and working capital financing is when you have strong controls on internal asset turnover and at the same time you have access to external working capital via bank lines, asset based lending facility, loans, grants, etc.

We constantly remind clients that if they are turning over their working capital accounts more efficiently all the time its in effect a measure of the true success of your company - think of it, you're buying things, paying supplies on time, and customers are paying you on time and ordering more goods and services. A quick tool for measuring your progress in this area is simply to take your receivables days and inventory days, subtract your payables days outstanding, and if that number is improving , or going down you are winning the 'working capital is bad for your health' premise we have presented.

As a Canadian business owner you are both granting credit and requesting credit (customers and suppliers respectfully). Understanding business capital in this manner will allow you to finance better internally and borrow via banks, finance firms, asset based lenders, etc.

Speak to a trusted, credible and experienced business financing advisor about our ' health’ problem and what your tools and solutions might be for better business success.

A Different Solution for Business Inventory Financing

We feel sorry for you. Your firm is not in the service industry. They are the lucky ones with respect to inventory financing - there is no inventory! Unlike your business, which produces goods and carries inventory to meet customer order needs your services firms have no storage requirements!

If your firm has an investment in inventory then financing for that asset is often, if not always, vital. Financing via bank credit lines for the inventory component of your balance sheet is always difficult, if not in some cases impossible. Most business owners and financial managers know that of your two major current assets ( receivables and inventory ) that banks prefer receivable , aka a/r financing .

So how do you finance your inventory, and what are the requirements to get such a facility in place? The reality is that every business is different and your firm will have different categories of inventory - most commonly they are raw materials, work in progress, and finished goods.

Inventory financing in Canada is most often financed under an ABL facility. What is ABL is the next question our clients always ask. The acronym stands for asset based lending, and is a specialized type of financing that is mostly carried out by non bank institutions. Facility sizes tend to range from 250k and up, as it is not really economical for all parties (you and the lender) for finance amounts much under that.

Your ability to control, report, and purchase inventory most economically are key drivers in an inventory financing decision made by your inventory financier. Your ability to monitor, stock, and produce and bill and collect are the basic requirements for an inventory financing facility. We would point out that in many cases this facility also includes a receivable component, because, as we all known, inventory flows into a receivable which flows into ... dare we say it... cash!

If you are unable to finance your inventory properly you can very easily get into what can best be describe as a ' cash trap '- and that’s not a good trap to be in. Typically each one thousand dollars of inventory on hand can cost you between 150 and 250 dollars per year when you take into account some obvious and not so obvious factors such as financing costs, storage, handling, insurance, and deterioration of the inventory which by its necessity forces you to do an asset write down .

The irony is of course that you can have too much inventory or too little, it’s a balance act.

When you arrange inventory financing you want to ensure you have reasonable levels of product - so you need to focus on both financing cost and order costs.

If you have inventory financing fast efficient turns are potentially more possible and you annual carrying costs can be dramatically reduced- don’t forget that the cash you invest in inventory could be put to work elsewhere and in many cases earn, for example, at least 12% more in profits. That’s a very typical number for a manufacturer.

Financing inventory is a challenge - you want to be able to take advantage of volume discounts, but at the same time limit your investment in inventory while satisfying customer order needs. Whew! That’s a real teeter totter don't you think?!

Speak to a trusted, credible and experienced business financing advisor who can guide you through inventory financing in a manner that supports your business and industry. Beating the inventory financing challenge is a solid financial accomplishment.

5 Tips For Selecting The Right Leasing Company For Your Equipment Finance Needs

Partnering is more often than not the right thing. Bad partnerships don't work and can adversely of course affect your business. That’s why it is so important to select the right firm to originate your equipment finance needs.

The right leasing company on a long term basis will ensure that you are investing properly in the assets you need to run your business for your customer base.

Let’s look at 5 key tips we can provide you to ensure you are putting the right financial strategy in place around asset acquisition. Successfully working and negotiating through these tips with the right leasing partner guarantees you business equipment lease financing success.

Its all about getting approved of course , and getting an approval quite frankly is the biggest decision your lessor has to make around the transaction - that approval can be significantly influenced by yourself - it is important to present both the positives around your firms financials, as well as the challenge you may have, or may be facing,

Chance of getting approved is significantly reduced if negative information about your firm or its financials arises after your submission. Factors that affect your approval are your time in business, your ability to have sourced financing in the past - i.e. other lessors, banks, etc. Other key areas of focus are trade references and the ability of the owners to demonstrate they run their personal lives in a fiscally responsible manner also. This is usually accomplished by the lessor drawing a credit bureau report. On transactions over 50,000.00$, as a general rule financial statements are required, and areas of focus will be your overall balance sheet health and the ability to generate positive cash flow to repay the lease .

Lets move on to rate, we are never under surprised with how much our clients focus solely on rate and their ability to drive down the lessors yield . In Canada leasing equipment is very competitive, and all we can say is that if you have presented your financials properly the market will ensure you have a competitive rate. Naturally you can spend all the time in the world securing a ' better deal ', but consider management time and total savings. A quick example: If you leased a 75k piece of production equipment and were quoted a rate of 10.25% and you spent a lot of time in sourcing another quote, re submitting your financials to a new firm, etc , and got a rate of 10.00% you would be saving twenty dollars a month. We'll let you decide the value of your time.

We have covered off credit approval and rates, Documentation are important also. You should be prepared to provide a proper invoice or quote to the lessor, as well as a certificate of insurance. The equipment lease and your acceptance of delivery are key to the lease commencement. Smaller transaction in Canada has been greatly simplified, so you should typically be provided with a one or two page lease agreement. Larger transactions are of course more complex.

The type of lease you choose and your analysis of the lease versus buy decision is also a key area of focus. Look at your cash flow Vis Vis payments you will make on a lease versus a loan basis. As a general rule leasing tends to be more expensive, but is easier to obtain and is less of a drain on your cash flow.

Two is the magic number. There are two types of leases you should inquire about, a full payout capital lease, as well as an operating lease where use of the asset is more important than owning the asset.

Your overall lease financing decision should be focused on a very simple question - namely:
- is the asset acquisition important to your business profitability and productivity. If new assets and proper financing position your business for competitiveness you have made the right financing decision.

We have covered off 5 key areas in the selection of a leasing company in the equipment finance area. If you find the information and the challenge overwhelming speak to a trusted, credible and experienced business financing advisor who will help you achieve lease financing that meets your goals.