Your Working Capital Needs Just Got Solved By Factoring Finance
FACTORING AS A SOURCE OF FINANCE IN CANADA
Factoring Financing in Canada for Canadian small and medium-sized businesses is somewhat limited due to the financial alternatives available to Canadian business owners and financial managers.
Also, the overall structure of our banking system, although conservative and strong, by its own nature limits working capital and debt options, especially for assets like commercial accounts receivable. Small and medium-sized businesses in Canada need a form of financing to achieve growth objectives when addressing the future of business funding.
WHAT IS ACCOUNTS RECEIVABLE FACTORING FINANCING?
If your company is trying to grow significantly, or in some cases, survive, your company needs access to business capital. Using invoices as collateral is a way to achieve that via factoring financing companies.
WORKING CAPITAL FINANCING SOLUTIONS
When we meet with Canadian firms to discuss their working capital arrangements and needs, the meeting generally starts with discussing the working capital need. Receivable financing is where the majority of that financing comes from. We can, of course, discuss the matter ‘technically‘ also. Finance analysts and bankers looking at your financial statements can quickly calculate what is known as the ‘Quick Ratio' :
That is simply taking our cash on hand and receivables, adding them up, and dividing by your current liabilities. As accounting-like and technical as this may seem, we strongly recommend to business owners that they monitor this figure quarterly, monthly, and annually – it’s a great investment in understanding your cash needs as well as your days sales outstanding performance.
"WHEN THE BANKS SAYS NO"
When business owners are faced with cash flow and working capital challenges, owners must address what solution is available to increase cash flow; and invoice factoring via a commercial factoring company is one solution.
Factoring financing institutions are usually non-bank commercial finance companies in Canada, who unlike the bank finance your company while the focus is not dependent on your balance sheet.
If your company does not have traditional Canadian chartered bank financing, the concept of ‘factoring' has the ability to remedy your working capital challenges. A/R Financing does not focus on the credit history of owners, unlike how an owner's credit score is a key focus in Canadian business banking. That's one of the key advantages of factoring financing in Canada.
Receivables finance vs factoring comes down to the issue of either assigning your receivables to a bank of selling them on a selective basis to suit your cash needs. Businesses have to have decent gross profit margins to absorb the factoring finance cost and receive immediate financing upon approval of the facility.
Factoring in Canada provides you immediate cash for your receivables that you otherwise would be waiting for 30, 60, and yes, unfortunately, sometimes 90 days for your funds from customers. If we go back to our ‘Quick ratio' example, we can see that your cash and receivables on hand might clearly not be able to cover your current liabilities, most notably accounts payable, Government source deductions, etc.
FACTORING COMMERCIAL ACCOUNTS RECEIVABLES IS CASH FLOW MONETIZATION AND NOT DEBT ON THE BALANCE SHEET
We can't overemphasize that factoring as a solution is not ‘borrowing‘ or term debt as the bankers like to call it. It is simply a method of liquidating your current assets earlier than you anticipated, giving you the cash flow to pay supplies, employees, etc. That is the solution delivered by factoring companies.
The basics of ‘factoring’ in Canada vary widely. That is partly because, in our opinion, factoring in Canada is viewed much differently than where it originated in the U.S. and England. We, therefore, encourage customers to understand what the Canadian factoring environment is all about so they do not lock themselves into a financing strategy that is contractual in nature, has too high a cost, and is not productive from a daily paperwork point of view.
Many businesses in Canada have major misconceptions about factoring as alternative financing. When we meet with customers, we continually find we are clearing up those misconceptions by discussing the following points:
The Canadian Factoring landscape is very different than in the U.S.
Canadian businesses in Canada generally have the perception that factoring is both intrusive to their customers and that the overall credit quality of their customers limits the amount of funding that your firm can receive under a factoring facility. When we talk to customers, we can show them ways to offset most - sometimes all! - of the costs of factoring.
WHAT DOES FACTORING COST
Many customers view the actual factoring cost as an ‘interest rate. ‘ This is a poor way of looking at the cost – a better way is to view your ability to get unlimited cash flow financing at the expense of a 1-2% reduction in your gross margins. Prompt collection of your accounts receivable will reduce your financing costs.
EXAMPLE OF HOW FACTORING WORKS ON A DAY TO DAY BASIS
Many Canadian firms also don’t understand the day-to-day basics of factoring – we can, for explanation purposes here, simply say that it is the selling or 'discounting‘ of your receivables in two steps.
You receive 80-90% of the cash for the invoice the day you generate the invoice, and it is a true earned or ‘owing' invoice. You receive the balance when the customer pays you, less the 1-2% discount fee that we talked about earlier.
FACTORING VERSUS PURCHASE ORDER FINANCING: CAN PO FACTORING FINANCING AND RECEIVABLE FINANCE BE USED TOGETHER
Clients at 7 Park Avenue Financial sometimes confuse factoring in Canada with Purchase Order Financing. They are not the same. The factor/a/r financing solutions is a method to cash flow your invoices from creditworthy clients - Attached to that is a fee in the 1.5-2% range, so a client should have typically good gross margins to absorb the financing charge. For more information on how P O FINANCING works, click here.
CONCLUSION
Are factoring services Canadian business the panacea and ultimate solution for every Canadian firm? Definitely not. Can it help thousands of small and medium enterprises in Canada fix their funding challenges? Absolutely yes!
Work with 7 Park Avenue Financial, a trusted and experienced advisor in this area to ensure you have the best facility, the right asset based finance factoring company at the best rate that suits your business model and way of doing business over the long term via a factoring financing solution. Let our team be the growth strategy funding experts you have been looking for.
FAQ: FREQUENTLY ASKED QUESTIONS
What is factoring?
Factoring is a business finance transaction and is a method of selling accounts receivable/outstanding unpaid invoices at a discount. The factoring of accounts receivable allows a company to meet its short-term debt obligations by using this customized flexible approach method of ' debtor finance' as a type of line of credit.
How does factoring finance a company?
Factoring debt financing works for business when a financing company, known as the ' factor ' provides business capital to a company by purchasing and paying for outstanding invoices for creditworthy clients of a business. Typical advances on the receivables are in the 85-90% range and funds are advance promptly, usually same day or the next day. Companies receive the balance of the invoice advance when the debtor pays, less a factoring fee.
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Email = sprokop@7parkavenuefinancial.com
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7 Park Avenue Financial provides value-added financing consultation for small and medium-sized businesses in the areas of cash flow, working capital, and debt financing.
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. He is an experienced
business financing consultant
.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 financing 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.
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