One alternative to borrowing funds or raising additional ownership equity in your firm for cash flow financing is the solution provided by factor companies in Canada via accounts receivable financing / factoring.
This solution is becoming more and more popular and much of the mis information around this type of Canadian business financing is being cleared up and clarified properly as thousands ( yes thousands) of companies just like yours look for new business financing methods when the old ones either don’t work or aren’t available .
Let’s focus on a couple of the main points that clients want to better understand when they consider cash flow financing via factor companies. Those two key points, if we had to sum them up, are: What is the real cost of factoring, and how does it work on a day t day basis?
In Canada it is somewhat safe to say that pricing on receivable financing is somewhat ‘ all over the place ‘. Rates range from 1-3% per month. So what drives that pricing then? The key areas that factor into factoring pricing are the size of your facility, the general overall quality of your Canadian and U.S. receivables, and the relative financial health of your firm as ‘ borrower’. We hasten to add that when you finance your firm in this manner you aren’t actually borrowing or taking on more debt… you are just ‘ monetizing’… or we could say ‘ cash flowing’ your largerst current asset, which is typically receivables .
You can win with factor companies when you become in effect a ‘ educated buyer’… what we mean by that is it’s important to understand the Canadian landscape when it comes to who you are dealing with. There is an incredibly fragmented industry here, and it’s yours to take advantage of if you know how.
So who are the players in the industry, because it certainly would be a challenge if you had to investigate them all! as there are hundreds of firms. These firms are Canadian, U.S., and U.K. owned, some are major corporations, some could simply be called ‘mom and pop’ finance firms, and finally some are medium sized in nature and capitalization and are solid candidates to handle all your business financing.
With respect to how this type of financing works… our recommended preference is confidential invoice discounting… a term we give to factoring which allows you to bill and collect your own receivables , with no notice being required to apprise your clients of how you are financing your firm .
Typically, if not always the U.S. and U.K. firms doing business in Canada do not offer this type of financing. Your best bet is to seek someone knowledgeable in the factoring market and ensure you partner up with the right firm. That’s where working with an expert always pays off. Naturally if you have all the time in world to speak to and investigate hundreds of firms who might be a poor choice for this type of financing need then by all means… go ahead! And for the record we’re jealous of that time you have on your hands in running a business!
Getting back to pricing on this cash flow financing method. Remember that you aren’t borrowing funds, you’re selling receivables. So by utilizing this financing you’re generating immediate cash flow every time you make a sale. You are not constantly ‘ re-applying ‘ for a new line of credit, similar to a bank scenario.
Canadian firms make best use of this financing when they have growing sales and fairly decent gross margins that allow them to absorb the financing cost. Your strong sales growth brings immediate cash; the fixed costs in your business generally remain the same… so the higher business volumes bring incremental profits to your firm
Our bottom line? As usual we encourage you to work with an ‘ expert’… so consider seeking a trusted, credible and experienced Canadian business financing advisor who can assist you in your cash flow financing needs.