Hundreds, probably thousands of Canadian businesses are gravitating everyday to newer types of business financing in Canada. One of those is the sale of receivables as a financial funding tool. Otherwise known as receivable finance, or factoring, or invoice discounting … the bottom line is that you want to know more about this form of business finance, and who is offering it. Similar to many situations we encounter in our personal and business lives it’s important to ensure you have assessed the proper information when making a major financial decision.
Cash flow shortages, fortunately or unfortunately, are an everyday fact of Canadian business. The typical first reaction of the Canadian business owner and financial manager is to turn thoughts to ‘ loans ‘… or ‘ the bank ‘. While those two ‘ alternatives’, if we can call them that might be achievable the reality is that in many cases these solutions are limited, non existent, or available to you based on your firms current financial position.
Enter sale of receivables financing! By utilizing an invoice discounting strategy you generate immediate cash for your firm. Yes, there are some technical nuances to this type of financing, but one you have those under your belt you have achieved a major business milestone – the freeing up of working capital! That new capital allows you to in most cases to invest in additional inventory and finance ongoing sales without the pressures of a cash flow shortage.
Let’s get one key point out in the open right away – and that’s simply that we’re keenly aware that the cost of this type of financing often is, rightly or wrongly foremost in our clients minds. The actual cost of factoring and financial funding in this manner is definitely higher than bank or term loan financing of a traditional sense.
First of all, the factoring industry is not regulated per se, that’s what it’s necessary to pick the right partner firm. Ensuring you get a competitive rate is critical, and even more critical is to ensure you are embarking on this type of business financing for the right reasons. And those reasons? They are growth, survival, expansion, etc. It’s important to also remember that this type of financing is viewed more often than not as a ‘ bridge’ back to traditional financing.
So, the right partner. It’s critical. The key factors that will allow you to get the best rate and day to day functionality of this type of financing are the size of your monthly a/r portfolio, its general quality, the actual size of the invoices themselves, as well as the amount of customers – i.e. a few large customers with large balances, or many customers with smaller balances. Those are driving factors in who you deal with and final approval. The best A/R financing rates in Canada tend to be in the 1.5 – 2% range per month – and proper utilization of these funds can reduce that cost significantly, almost getting you close to bank rates in select cases.
In Canada a variety of firms offer this type of service. Our recommendation to clients is to work with firms who offer confidential receivable financing, this sets you immediately apart from firms who offer such financing but impose the condition of notice to your clients on a one of or on going basis.
Common sense business fundamentals apply to this or any other business finance decision you make. Work with a trusted, credible and experienced Canadian business financing advisor who can assist you in partnering with the right firm, at competitive pricing, and under a facility which allows you achieve benefits with control of billing and collections still maintained by yourself.