Factoring accounts receivable is fast becoming one of the most popular ways to generate cash flow and working capital for your business. Thousands of firms in Canada utilize this strategy as a primary method of funding their business.
Let’s examine why this business financing strategy works and how you can best assess if a factoring receivable solution is the best choice for your firm. We also point out to clients that the Canadian landscape for this type of financing is somewhat different from the U.S. models of this type of financing, and one of the most important decisions you can make after choosing to enter into such a strategy is simply picking the best partner for your particular needs .
Factoring is becoming more popular for Canadian business financing simply for one reason – which is that some of the other more traditional forms of business finance have dried up and are not available due to the world economic meltdown of 2008-2009.
Business prospects have clearly improved, but business access to capital has been very slow to catch up. Most Canadian business owners and financial managers turn to banks when they need financing; if your firm is established, has decent financials, is profitable, and means a number of ratios and metrics required by the banks then this clearly is your option of record for business financing – certainly from a cost perspective.
However, if your firm can meet, or qualify for traditional business financing (we are referring mostly to business lines of credit for receivables and inventory) then you must search out and explore additional sources of working capital.
One great piece of mis information out there is embodied in the question many clients come in and ask us about – namely ‘Are there any government grants or loans for my business?”. The reality around that is that there are two programs that consistently deliver on the governments promise to fund small business – one is what is commonly known as the Small Business Loan; the other is the government’s research and development non repayable grant, commonly called the SRED program. That’s great news, you say. Well yes and know, because neither of these programs touch on nor affect our subject matter, which is working capital. The SBL loan covers only equipment and leaseholds, and the SRED program covers a refund on your R&D, if in fact that is applicable.
So we come full circle to how does factoring work and why are it a potential solution for your firm. It works in a very simply manner – you sell you invoices, either one at a time, all at once, or regular periodically at your choice . The key word is selling. When you sell something you get cash, and factoring receivables is your method of obtaining immediate cash.
The complexity of factoring, if we can call it that, is simply how it works on a day to day basis within your own business model, and more importantly, how it affects your customer base. Using traditional factoring as our explanation your firm issues an invoice, you are advanced immediately approx. 80% of the funds, i.e. almost the same day!, and when your customer pays you get the rest of our funds immediately, less a financing charge .
That aforementioned financing charge becomes the most important point of focus for many of our clients – as rates in Canada on a monthly basis range from 1-3% per month .When clients address that issue of cost we point out to them that if they have solid gross margins, can turn over receivables, and have the ability to purchase more effectively with the new cash that the cost of factoring inevitably becomes somewhat of a non event, based on the fact that this facility provides you ‘ unlimited’ working capital on a long term basis.
In Canada the challenge becomes finding the firm that works best for you with respect to the receivable strategy we have outlined. Many of the small nuances around how factoring is marketed, explained, and works on a daily basis becomes the bone of contention for our customers. Seek out a trusted, repeatable, and experienced business financing advisor who can guide you through the factoring maze relative to price, size of facility, and most importantly, how the facility works on a daily basis to augment your cash flow and working capital.
Factoring accounts receivable, when done properly, is a solid tool for you cash flow and working capital needs.