Financing Cash Flow Needs : The Factoring Way
OVERVIEW – Information on the Canadian receivable finance strategies known as factoring . Receivables represent a major source of liquidity and knowing how they can be financed is key to business success
Receivable finance in Canada is a function of managing the investment your company has in A/R. The cash flow needs that arise are directly related to your policy of granting commercial credit to your clients – and the severity of that need is commensurate with the level of slowness your clients take in paying you.
‘Quick ‘ is the word we hear most often when it comes to invoice financing. The real challenge though is the ability of the owner/ financial manager to ensure he or she has the right facility in terms of size, rate, and being able to live with the way this method of credit facility is handled. Our most common and recommended solution is CONFIDENTIAL RECEIVABLE FINANCE, allowing the owner/manager to mirror the same type of borrowing that could be achieved through a bank scenario.
That begs of course the question why the owner simply wouldn’t utilize Canadian chartered banks as a solution to the cash flow/working capital challenge. For further clarity in that manner it’s also important to understand that factoring receivables is not a ‘ loan ‘, and it certainly does not add any debt to the balance sheet.
Firms that choose to go the bank route for a revolving credit facility must be able to demonstrate consistent profitability, in addition to a balance sheet that reflects required ratios around debt to equity. Any imbalance in your ‘ current ratio ‘ of liquid assets to payable and other debt you have also can bring a screeching stop to bank approval. Many firms actually do qualify for bank financing, but not enough to meet their needs. A typical example is when large orders or contracts need to be filled in a timely manner.
The common advantages of factoring receivables are:
Unlimited credit relative to the amount of sales and A/R you are achieving
Unrestricted use of funds for general commercial purposes
It is a common misconception that you have to finance all your a/r all the time – that is certainly NOT the case, and prudent owners/managers will simply draw down what they need , paying only for what they are using in the facility at any given time . That alleviates a lot of the cost of the facility, which typically in Canada, using $ 10,000.00 as an example, costs 200$ for a 30 day period. Naturally the benefits of receiving those funds immediately include being able to satisfy all your operating obligations, as well as being able to better manage price and discounts with key suppliers.
As we consistently meet Canadian business owners who are not even familiar with this method of financing its quite a consolation to them to know that factoring has been around a few hundred years – with even major FINANCIAL POST top 500 firms utilizing this or similar ( securitization) methods of cash flow financing.
Certain industries such as transportation, staffing, are perfect candidates for factoring, but the reality is that any business with commercial receivables qualifies.
The type of facility you set up (traditional vs. non notification), the cost, who you are dealing with, and the actual agreement is what makes or breaks success in non bank A/R financing. Seek out and speak to a trusted, credible and experienced Canadian business financing advisor who can assist you with your working capital needs.
Author: Stan Prokop – 7 Park Avenue Financial :
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 90 Million $ of financing for Canadian corporations . Info /Contact :
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