Account receivable financing in Canada is sort of the Canadian business owner/financial managers way of reversing the curse. The curse? It’s of course carrying your accounts receivable. And a receivables factoring program is one solid method of eliminating that curse. Let’s dig in.
For Canadian business the level and importance of carrying A/R is dependent on several key elements. They include the quality of your customers, the size of individual transaction/invoices, and whether your product is a product… or a service.
A/R financing addresses all of those issues. If your firm cannot qualify for traditional bank financing, but can generate clean invoices that demonstrate your clients have received the products and services they have bought or contracted for you in effect have unlimited access to business credit . That’s a surprise to many clients who often feel challenged in their ability to obtain business cash flow/capital.
The other key point around a successful invoice factoring program is the ability of your firm to take on an unlimited amount of business. Again, that’s a surprise to the Canadian business owner / manager who feels constrained in their ability to grow their business.
There is an interesting analogy we can make about the pricing around A/R finance. Many Canadian businesses offer a discount to their clients for prompt payment, that discount typically is in the 2% range. While the majority of your clients can’t take that discount (they have their own cash flow problems!) the pricing around a factoring program is quite similar. By that we mean that financing receivables works in essentially the same manner – you forgive that 2% to get all your A/R, or as much as you want, financed immediately the day you bill for your products and services. Talk about co-incidence!
One of the key ‘ power issues’ around a receivables factoring program revolves around the issue of ‘ turnover’. While many view the financing more expensive than bank financing (were assuming they think they qualify for unlimited bank financing!) the reality is that if your sell, finance your A/R, generates profits, and keep selling more and repeating that process your firm is an instant winner in the profit/growth game. So yes you should always weigh the cost of account receivable financing against all your alternatives more often than not you will find it’s always there, and always available.
By the way, owners, investors in your firm, and any lenders you have, term or otherwise will always look at the way you manage you cash flow, predominant via current asset mgmt.
Why are you always going to need some level of AR financing? If you’re growing the amount of receivables you have will grow commensurately with your level of sales. (That situation will worsen when if you manage your accounts poorly).
By the way your gross profit margin is always a factor in considering how you finance your A/R effectively. In a perfect world you will have high margins and high turnover and good clients. (Its not a perfect world by the way!) A great way to track your effectiveness in A/R mgmt and financing needs is simply to chart sales levels and A/R levels together.
So yes, carrying A/R is a curse of some manner. But dont forget it allows you to grow sales, generate profits, and take your company to the next level. An effect factoring program via account receivable financing is a great way to address the issue. Our recommended solution is by the way is CONFIDENTIAL A/R FINANCING, allowing you to circumvent the traditional factoring program and bill and collect your own accounts. Seek out and speak to a trusted, credible and experienced Canadian business financing advisor with a track record of business financing solutions.