Over paying is never a good thing, so our clients who have adopted a business financing accounts receivables factoring strategy can , we think, be forgiven for trying to understand, and rationalize how pricing works in this type of financing .
Let’s examine some key fundamentals on how factoring pricing is achieved in Canada, and how you can ensure you have received the best pricing. You have made the decision to accelerate your working capital and growth needs by embracing an A/R financing strategy.
Congratulations, as you’ve made the savvy decision to avoid taking on more debt, or necessitate the need to bring in extra equity or even, worst case, dilute your current ownership by having to bring in a partner or investor, etc.
When clients ask us the most basic questions, such as ‘ why should we consider business accounts receivables factoring financing we use a simple example that simply illustrates what the potential here is for this type of financing , ( Once you have rationalized the cost ). That example is that you have in effect turned your company into an automatic teller machine, creating unlimited working capital as your sales grow… Even the big boys wrestle with that one, so congrats!
And speaking of those big boys, clients are always surprised to hear that some of the largest corporations in Canada utilize this method of financing.
So back to our core subject of course, which is both understanding, controlling, and feeling you have been able to choose the most effective pricing for A/R financing.
Several issues come into play. In general when you utilize this type of financing your own firms general credit worthiness does not come into play, because it is your assets – i.e. the receivables! that are being financed. So our first point is simply size, in that you can do a factoring (aka invoice discounting facility) for 15k a month, or 15 Million a month. However, speaking in general terms small and medium sized firms in Canada have been paying between 1-3% on a 30 day basis for financing receivables in a ‘ traditional’ type of facility. If you are paying anything more than that you in general do not have a competitive offer – so try and change that!
What do we mean by traditional? Simply that Canada was for many years slow to catch on to A/R financing strategies, so the industry is somewhat dominated by U.S. and British firms, even on our own soil. Their facilities are structured similarly all over the world, which is one of the reasons we have never favored them as ‘ optimal ‘ for Canadian firms. Our own preference on financing A/R is a system known as C I D, confidential invoice discounting, which allows you to bill and collect our own receivables, without any notification to your customers or your suppliers.
And when it comes to pricing mis information exists out there that this type of facility (C I D) costs more. It does not. We repeat, it does not.
Is it possible for the Canadian business owner and financial manager to wrestle down the basics of how accounts receivable factoring business financing is priced? It sure is. You only have to know three things, the advance rate, the actual discount or purchase fee, and the time in which the invoice will be paid.
We hasten to point out that you in effect have control over one of the three critical factors that affects A/R financing pricing. That’s the time to collect, since the less time the invoice is outstanding means your pricing just got better. Simple as that.
Percentage advance is a different story, its one of the factors you can’t control, and it’s simply the amount the finance firm advances you on each invoice. In general 90% is a typical advance rate, meaning simply that you get on day one 90% of the invoice amount as instant cash flow – the other 10% is remitted to you when your customer pays.
Other ways you can both understand and affect pricing are by watching miscellaneous items that can add up. They include nominal amounts such as set up costs, wire transfer costs, admin charges, etc. Make sure to calculate them in your overall pricing, and negotiate hard, when you can to reduce these charges.
So whats the bottom line. Simply that the factoring firm, i.e. the lender, has only one goal, make larger returns on your receivables. By understanding how this pricing is achieved, negotiating on items that you can, and then monitoring your A/R aggressively… well we think you get the picture, you are in a postion to ensure you are not paying too much for this valuable financing.
Want some expert advice on this subject, that’s easy also, seek a trusted, credible and experienced Canadian business financing advisor who can assist you to ensure you have achieved best pricing available.
P.S. Congrats on your new ATM machine!