Canadian business owners are demanding more information on receivable factoring and how factoring services can help their working capital and cash flow needs. When we talk to clients we talk about several myths and misconceptions about factoring in Canada .
Let explore some of those myths, misconceptions and mis understandings.
1. Factoring is pledging your receivables – (Wrong!)
2. Factoring is expensive (We will let you decide!)
3. Canadian factoring services are the same as in the U.S.( Not necessarily)
1. Factoring is pledging your receivables – This is a popular misconception around receivable financing. Some of the misconceptions revolve around the fact that various terminologies are used to describe factoring – these include invoice discounting, receivable financing, etc. The reality is that factoring is the sale of your receivables for immediate cash. In effect your company sells its receivables and your firm gets immediate, almost same day, (often same day) working capital and cash flow for your business. The factor firm benefits as they make an immediate profit on the purchase of that receivable. We should point out that customers in Canada can sell one receivable or all their receivable; they have that option and often don’t necessarily know that. The transaction becomes extremely favorable to the factor firm based on the amount of holdback you negotiate on your transaction. Many factor firms hold back up to 20% of the receivable and don’t give those funds back to you until your customer pays.
2. Factoring is Expensive: This is clearly at the top of the list of every discussion we have with customers around factoring. The reality is that customers view the cost of factoring as an interest rate, while the industry itself views it as a discount on the sale of the receivable. Discount rates in Canada vary from 9% per annum to 2-3% per month.
So yes, if you as a business owner view the factors ‘ charge ‘ as a finance interest rate you will perceive it as expensive . What Canadian business owners don’t do is to reflect how much it actually costs them to carry receivables for 30, and sometime 90 days. And, get ready for this – they also many times don’t realize they can use the immediate same day cash they get for their receivables to take prompt payment discounts with their suppliers, and, furthermore to negotiate better pricing and larger purchases with valued suppliers . We have know some customers do totally 100% eliminate the entire cost of factoring by buying smarter and better and paying suppliers on a 2% 10 day scenario. That is true cash flow power!
3. Factoring came to Canada from the U.S. and Europe. It was very slow to catch on and is catching on very quickly these days, aided of course by the overall global credit crunch of 2008 and 2009 – We are still in that crunch of course and business financing is still difficult to achieve for small and medium sized business in Canada. Factor firms in Canada vary in size, and many are simply branches of foreign operations. We believe a Canadian factor firm who understands the needs of Canadian business is best suited to your needs. Each factor firm has a different way of doing business, has a daily paper flow that differs often substantially, and prices their rates and holdbacks (remember the holdback!) in a different manner.
Speak to a trusted, credible and experienced financing advisor who will ensure you working capital and cash flow needs will be met by such a facility. Use the facility wisely to grow profits and cash flow.