More and more Canadian business owners and financial managers are considering factoring as a viable alternative financing solution. Everyone seems to tell you that ‘factoring is expensive ‘. If that’s the case why would you want to choose this financing solution? Even moreso, is it even remotely possible to achieve interest free factoring or factoring at zero cost? Let’s show you why that premise is defensible and we will let you decide.
If you are a small or medium sized business you know the true value of financial serenity when you have positive working capital and cash flow. Actually, cash flow is great, if you have positive working capital that simply means that you have a major investment in accounts receivable and inventory, and that isn’t necessarily great, especially if your balance sheet accounts such as receivables aren’t turning over every 30 days.
Does anyone ever pay in 30 days anymore? We don’t think so, that’s for sure.
When your firm is able to more efficiently used cash flow generated from accounts receivable you have easier ability to grow your business. In fact as a business owner you quickly realize that the single largest asset on your books is often accounts receivable. In the current economic environment it takes easily one, often two, and sometimes 3 months to collect the average receivable. When you delay payments to suppliers you are increasing your cash flow from operations, when you grant credit to your customers you are decreasing that same cash flow – it’s a daily battle that plays out every day.
Factoring, or receivable financing allows you to collect and immediately invest those funds back into your business.
A quick example offered by a firm called the Receivables Exchange (U.S. based) is as follows –
Let’s say your firm earns 20% on the money it invests in itself, therefore in 44 days your firm can earn a 2.2% return.
Now let’s get to the root of our premise. Factoring companies don’t charge ‘interest ‘per se, because you are not borrowing funds. You are simply monetizing your receivables at a discount for immediate cash today. Let’s use a typical factoring discount rate of 2%, which is certainly not uncommon. That’s a 30 day rate. There is better pricing, and there is higher pricing.
But look at what we are saying – if you can immediately, on the same day you generate an invoice get cash , re invest in your business , and earn a profit, ( we will use our example of 2.2% return in 44 days ) haven’t you in effect achieved zero interest charges on your working capital financing .
Let’s make a more clear and dramatic point – Use our example again of a 2% discount fee for 30 days. What if your receivables for the month were $ 300,000 and you were factoring them at our 2% discount rate. If you have immediate cash for that $ 300,000.00 do you think you could pay major suppliers immediately and subtract 2% for their stated net 30 day payment terms. Also, do you think you could meet with your major and valued suppliers, advice them you were in a position to pay cash on the basis of getting better pricing, and would they accept!
We hear the saying ‘cash in king ‘everyday in business – after the 2008 economic meltdown Cash ruled supreme. By offering to pay your suppliers more promptly and buy in greater quantities we have had many clients tell us they have achieved as much as a 5% saving in some cases.
Let’s recap the premise of our information. It’s simpler that it may sound:
**Factoring offers you immediate working capital, and purchases your invoices at a discount – it is incorrect to view these funds as a loan, or an interest rate per annum.
** If you got the typical fee of 2% as a discount charged on factoring by your factoring company and had unlimited cash flow and working capital could you purchase more effectively and pay suppliers more promptly, taking a discount all along the way . Yes we believe you could.
You will never get a letter from a factor firm that states you are being charge no finance charges – but we have effectively shown that the cost of that financing, balanced against carrying your customers and being able to take supplier discounts and purchase more effectively can add thousands of dollars to your bottom line . And at the same time you have removed the business person oft greatest worry – lack of working capital.