AR Finance in Canada seems straightforward to most Canadian business owners and financial managers for the most part. However if you are not dealing with the right receivable financing company under conditions that reflect how you do business… well let’s just say… Confusion has the ability to set in.
So let’s share some of those pearls of wisdom around the cash flow financing mechanism that works great… when you understand whats happening.
Rather than taking on debt to finance your firms ongoing working capital needs many companies choose instead to monetize their 2nd most liquid asset – A/R. ( Cash on hand is of course your most liquid asset – it’s just not as plentiful as you want it to be!)
If you firm meets bank criteria for cash flow / working capital needs you’re in effect using that A/R as collateral for what most call a business line of credit. That’s not really how Account Receivable financing works – under the ‘ paperwork ‘ involved in factoring you are , at your discretion, constantly selling your accounts for a discounted amount .
The amount you receive, typically 97 – 98% becomes immediate cash on the balance sheet – pretty well the same day you generate a sales invoice. In effect you’re simply shortening the total operating cycle of your business – and you can trust us that the costs associated with carrying your accounts receivable, risking bad debt, and missing out on opportunities to move your business forward because of a lack of cash is very nicely offset by your costs in the invoice to cash conversion via a Receivable financing company..
Canadian business owners have two choices when it comes to financing sales cash flow under the financing mechanism we’ve been talking about:
1. They can let an AR Finance firm run, manage, administer and finance all their accounts
2. They can choose to bill and collect in their own name, letting the finance firm remain quietly in the background. This method is we call CONFIDENTIAL A/R FINANCE
When we talk to clients that have used, or are thinking of using such an invoice discounting process we stress that it’s all about the quality of the firm you are dealing with. Ultimately you want a firm that understands your business model, prices competitively, and has the capital to grow with your business.
By the way, some of the largest and most successful corporations in Canada figured this same type of financing out a long time ago. They call what we’ve been describing ‘ SECURITIZATION ‘. Like your firm should be doing, they focus on keeping inventory low and A/R turning into cash on had as quickly as possible.
The ‘ PERFECT STORM ‘ in AR finance happens when your firm is:
FOCUSING ON GOOD ASSET TURNOVER AND MEASURING THAT TURNOVER
UTILIZING A RECEIVABLE FINANCING COMPANY TO FACILITATE GROWTH, NOT HIDE MISMANAGEMENT OF ASSETS
If you think this method of financing could work for your firm seek out and speak to a trusted, credible and experienced Canadian business Financing Advisor with a track record of success
who can assist you with the ‘ words of wisdom’ that will allow your company to maximize the challenges of business financing and growth.
Author: Stan Prokop – founder of 7 Park Avenue Financial
Originating business financing for Canadian companies, specializing in working capital, cash flow, and asset based financing. In business 10 years – has completed in excess of $90 Million of financing for Canadian corporations. Core competencies include receivables financing, asset based lending, working capital, equipment finance, franchise finance and tax credit financing.
Info re: Canadian business financing & contact details:
7 Park Avenue Financial
Off. 905 829 2653
Cell 905 302 4171