Receivable Financing in Canada is fast becoming a mainstream financing strategy for Canadian business owners and financial managers. However, in talking to clients they are concerned about two key issues around this innovative financing method.
Those two key issues are:
How does it work?
What are the Costs?
We firmly believe that if you understand those two critical points then your firm is in a position to benefit from receivable financing and Canadian factoring solutions. And those benefits are significant and quite clear. They include your peace of mind as it relates to business financing, since factoring facilities grow with your business and are unlike pre-set bank credit lines, etc . Also, many business owners confuse a factoring (also know as receivable discounting) with a loan. Let us be clear – Factoring is not a loan! There is no additional debt on your balance sheet, and there are no monthly repayments. In fact the overall optics of your balance sheet actually improves.
Time is money as the Canadian business owner well knows. Factoring or receivable financing in Canada works quickly and efficiently (When you have chosen the right partner and the right type of facility). Once the initial set up process is completed, usually in a week or two the facility runs itself at your discretion. You in effect have taken complete control of your cash flow. Slow paying clients can now be monetized immediately, i.e. the same day, into valuable cash flow and working capital.
Our final key benefit that we should focus on before getting back to our two critical points is simply that this financing tool, if used properly, allows you to generate more sales and increase profits via key turnover of receivables, inventory, etc. Not to get too technical but there is a great tool for analyzing your firm called the DUPONT MODEL. It simply allows you to calculate how the actual turnover of receivables and inventory leads to greater profits and returns on assets and equity. We encourage you to investigate that tool for some real analysis of how a factoring solution might be the solution to your business financing problems.
O.K. – You now know many of the key benefits of factoring. Is it right for your firm?
Critical point #1 – How does it work?
Factoring or receivable financing is simply best described as the short term sale, or ‘discounting ‘of your accounts receivable. You generate cash, at your option, on the same day that you generate an invoice for a sale and delivery of product and services to your client base. In Canada most customers and industry players use a ‘notification model ‘when they implement a receivable financing solution. That simply involves the factor firm confirming your invoices with your client basis after you have provided invoice back up to the finance firm. That system works, but quite frankly we firmly believe the best factoring or a/r financing solution is one in which you run your company, not the factor firm . So we strongly recommend to clients that when they have an A/R base over, say 200k per month that you consider a facility where you are billing and collecting your own receivables, but still enjoying all the benefits of factoring.
Critical Point # 2- What does factoring cost? Actually it’s zero per cent financing. Don’t believe us? We are being a bit facetious, but the reality is that the receivable financing industry in Canada does not express of calculate factoring costs via an annual per cent age rate. The problem lies in the fact that customers do in fact look at it that way .We have actually demonstrated too many customers that the true cost of factoring is actually zero or less than bank financing in many cases. Why is that? We hate to do it, but let’s go back to our DuPont Model Financial analysis.
If you factor your receivables, get cash the same day, buy more inventory with that cash, negotiate a better price with suppliers with that cash, and then repeat the process over and over we can almost guarantee you, depending on your industry and A/R turnover that receivable financing can become a profit mechanism for your firm. That’s certainly clears up a lot of the ‘negative ‘things you have heard about factoring, its costs, etc.
Speak to a trusted, credible and experienced business financing advisor on the benefits of factoring, how it works, and how financing costs can be controlled and reduced. That’s true cash flow and working capital financing for Canadian business.