Preparing For Financing Accounts Receivables in Canada – AR & Contract Finance Must Knows!

Thinking of diving in? There isn’t a day when we don’t get questions about the basics regarding one of the most valuable tools that small and medium size business owners can utilize for financing accounts receivables for the cash flowing of their ar and contract working capital investments.

However, there are many misconceptions about ‘ factoring ‘ (that’s the common terminology Canadian business owners use, and the issue of how pricing works for this type of financing is miss-understood by many.

The essence of this type of financing is actually quite simple – how it’s presented to clients and more importantly how it works on a day to day basis is where it gets confusing. But if you have the following basics down we can assure you that you’ll be well prepared to both enter into such financing, and, more importantly succeed with it.

As stated, it’s not as complicated as you think – although others do a good job on that one. Factoring of financing accounts receivables is simply the sale of your ar (A/R) and contracts to generate immediate cash as you require it.

This allows firms that are much smaller or who have any of a myriad of financing challenges (high growth, a poor balance sheet, financial losses) to still win at the working capital game.

There are three main reasons you probably want to consider ar finance. The first of which is simply that the cash flow you obtain in this type of Canadian business financing allows you to maintaining daily operations and in many circumstances take discounts with your suppliers terms to your own firm . That inevitably, in our experiences enhances you relationships with your valued suppliers.

Secondly your firm simply might not be able to currently obtain all the financing you need from what we typically call ‘ traditional’ financing sources, aka the banks. The third situation, and most appealing to many clients is simply the fact that you wont be losing sales and revenue opportunities at the expense of your competitors, who either are better financed… or perhaps already beat you to the a/r factoring solution.

Numerous other miscellaneous situations exist to consider this type of financing – they include speed and ease of approval. As well the inherent nature of this type of financing creates no upper limit on the amount of funds you can borrow.

So let’s cover 6 basic that you have to have under your belt to be successful in financing ar and accounts receivable.

First of all, your overall credit policy shouldn’t change because of A/R and contract financing – you are still responsible for any bad debts under a typical recourse agreement.

The most valuable piece of info we share with clients is that there exist a type of A/R financing that allows them to bill and collect their receivable confidentially. 99% of their competitors out there who use this financing are bound to notify your clients when you generate your invoice. We find that intrusive in the Canadian marketplace. We term this type of financing C I D – Confidential invoice discounting.

‘How much can we get?’ is the typical client question. The answer is generally 90% of any invoice is advance to you the same day you generate sales. The balance is a reserve or holdback that is paid back to you (less the financing costs) when your client pays.

Pricing! You thought we would never get there, right?! A/R financing and its pricing varies significantly in Canada. Typical rates are 1-3% per month. This is where a trusted and experienced advisor can save you thousands of dollars relative to how a facility is priced, how it works, covering off all the small nuance which can add up both favorably and unfavourabley if not well managed .

Finding the right partner firm is half the battle in ar and contract finance in Canada. And the special C I D facility type we mentioned is worth its weight in gold.

Interested? Want to know more about benefits of financing accounts receivable in Canada? Speak to a trusted, credible and experienced Canadian business financing advisor today.