How do firms that can’t qualify for bank financing (or all the bank financing they need) solve the working capital dilemma? A solid ‘ Plan B’ solution is (A/R) ar financing of your accounts receivables. Factor or discounting finance has become a significant contributor to funding of Canadian businesses – of all sizes.
Your ability to turn current assets such as receivables (and of course inventory) makes you quite simply a better credit risk for your lenders and suppliers. Most Canadian business owners and financial managers realize very quickly that profits do not automatically generate cash flow for your business. In the long run of course they do equal cash flow… however you will notice your suppliers and other lenders rarely want to wait for the ‘ long run’!
Naturally if you don’t need to borrow and can generate cash by waiting and collecting your receivables your cash flow stays ‘ internal ‘ To stay in business for the long haul you of course need 3 key underpinnings to your business – profit , cash, and solvency . As we have said profits don’t equal solvency in the short term and that’s where ar financing comes into play.
So why do thousands of Canadian firms (yes thousands) turn to factor finance. Simply speaking it’s an alternative way to funding growth, turnaround and restructuring. If utilized properly you are now in a position to take and negotiate vendor discounts with your key suppliers, enhancing your relationship over the long term.
So, the logical question we get from clients is of coruse ‘ why not the bank?’ Although bank financing of receivables is by far a cheaper method of financing your working capital that solid pricing comes with stringent credit requirements. The bottom line is that ar financing and funding has quite often much more flexibility when it comes to your firms particular current financial situation.
Factor financing is often viewed as ‘ the gap ‘… it’s the bridge between your current situation and traditional funding. There are a number of different ar financing solutions in Canada – many Canadian business owners and financial managers are confused by a lot of the terminology… recourse…notification… discount rate. Reserve holdback. Etc.
Our recommended solution to clients is what we term a ‘ confidential factoring ‘ facility. This facility allows you to bill and collect all your own invoices… unlike the majority of this type of financing in Canada no contact or notification is made to your clients. You simply must be in a position to maintain proper monthly financials and reporting around your A/R.
A key benefit of factor funding in Canada is that facilities grow pretty well automatically as your firm grows – there is not constant re-applying. Many clients miss the key fact that this type of financing is not debt – it’s a monetization of your assets. Over the long term you will increase profits and sales turnover.
Speak to a trusted, credible and experienced Canadian business financing advisor on how the funding and finance of your receivables can help you grow sales and profit.