Would Your Firm Pay 20$ to Get $1,000? Why An Accounts Receivable Credit Financing Factor Strategy Makes Sense In Canada

It’s an intriguing proposition and our segue today into a logical (we think) financial decision involving accounts receivable credit financing facilities, commonly known as factor finance in Canada. And who wouldn’t pay 20 to get 1000, but more about that a bit later.

Accounts receivable financing facilities are the sale of one, all, or part of your receivables on a one time or ongoing basis. The industry itself in Canada and the U.S. views the pricing around this sale somewhat differently than our clients. How? Simply because the industry thinks of the sale we have just referenced as a discounted price on the object of the transaction, your receivables.

Customers view it the other way of course, symbolized by the 3 most popular words in finance globally ‘ whats my rate’! The Canadian accounts receivable credit factor industry has evolved over time as a direct offshoot of the U.S. and European industry. It’s clearly evolved a lot more slowly here, but in recent years gained significant traction due to pullbacks in traditional lending by Canadian chartered banks and other institutions.

So how does an accounts receivable factor line of credit differ from bank facilities which margin your receivables? In 2 ways really. First the general focus of any financing of this type revolves around the size, quality and geographical nature of your receivable investment you are looking to finance. Unlike banks that bore down into your financials a factor firm 99% of the time focuses only on the general quality and credit worthiness of your A/R base.

And what about that other 1%. That brings us to our recommended manner of accounts receivable finance in Canada, confidential invoice finance. In that type of facility you are allowed to bill and collect your own receivables without any notice or notification to your customer base. So it’s like bank financing from a facility point of view, except the mechanics are a bit different. Main point – your firm is in control, billing and collecting your A/R.

The second reason A/R finance from an independent non bank finance firm is different from bank business lines of credit bring us to our subject headline today. In Canada the general rate on financing your receivables is in the 2% range. (Sometimes higher, sometimes lower, but it’s a good average). Remember also we spoke of accounts receivable factor finance as a sale of your A/R. So if we take out headline example, a 1000.00 dollar receivable costs you 20.00$. (This assumes your customer pays in 30 days).

So the challenge for Canadian business owners and financial mangers then simply becomes as follows: If you had that 980.00 dollars immediately after you generated a sale and invoice (no waiting) what would you do with the funds?

If you are growing quickly it becomes a very easy decision, pay suppliers, buy more products, negotiate better pricing with new found cash, invest in sales and marketing efforts, etc. We think you get the point.

So, bottom line, 20 will get you 980. Does that make sense for every firm in Canada? The reality is that some of the largest corporations in Canada use this financing mechanism. (Their rate is a bit better as you can imagine!) But if your firm is growing, has challenges, or simply cant access bank credit then this financing concept should be very appealing.

Speak to a trusted, credible, and experienced Canadian business financing advisor who can assist you in evaluating costs and benefits in factor financing in Canada.