We forgive you, and we are sure everyone else does also… for what…? Simply because you keep asking about the best factoring program out there and quite frankly you have factoring questions on this ‘relatively’ newer form of business financing.
So, factoring explained. Let’s cover off some key basics and arm you with data to make an informed decision as to whether his type of Canadian business finance works for you.
Step 1 – understanding what we are talking about. It couldn’t be more simple. As you generate sales and receivables you enter into a ‘ program’ to sell those receivables to a third party. As can be imagined, you receive a discounted price for your receivables , because you are getting cash today for something that would normally be collected 1, 2, and three months out .
The cost of factoring is always a key discussion point with our clients. The industry refers to this as a ‘ discount fee’, and in Canada that fee is quite frankly all over the place. We can make a general statement thought that typically the fee is in the 1- 3% range. We can hear our clients already. ‘We’ll take the 1% please!”. The reality is that you do have some control over the pricing in your factoring program, because the key drivers of the pricing are quite simple – the size of you A/R portfolio, the number of customers, where they are located, and their overall credit quality.
While customers tend to always focus on price in this discussion we frankly tell clients that the factoring questions they should be focusing on are more important – how does the program work on a day to day basis and how does it affect my clients and my business processes.
On a day to day basis you are advanced, as you generate invoices, approximately 90% of the invoice value – generally the same day you cut the invoice. Why only 90%. Simply because the finance firm holds back that 10 % as a reserve or buffer and it also covers off the financing cost. Let’s demonstrate a clear example. If you generated an invoice today for $100.00 you would receive via wire transfer 90$ into your bank account today. If you customer paid in 30 days ( you wish!) and the factor firm priced your program at 2% then when your customer paid the invoice you would receive your other 8 dollars back, the 2$ being the finance charge . It’s as simple as that.
Its not hard for our clients to see some of the immediate benefits – all of a sudden ‘ factoring explained ‘ requests become quite clear – it frees up cash flow instantly for general working capital purposes, suppliers can be paid on time, and you can purchase additional products and services that you need to grow your business on a daily basis .
Factoring , aka ‘ receivable discounting’ is different from banking – it comes at a higher cost , and works on a day to day basis significantly differently than if you were able to facilitate a bank line of operating credit . The harsh reality is that while many banks are pushing back on receivable and inventory facilities for small and medium business the factoring industry has kicked into hyper growth mode, seizing the opportunity to finance the liquidity gap in Canadian business.
Speak to a trusted, credible and experienced Canadian business financing advisor who will guide you through the process for success in Canada’s newest mainstream business financing strategy.
on factoring questions raised by Canadian business . How does a factoring program work, what does it costs . Factoring explained from the terms of benefits and daily processes .