It’s hard enough to worry about business financing…Canada has numerous options – receivable financing… aka: “factoring” is one of them that Canadian business owners and financial managers keep hearing about. But, and its a big but, how does this type of financing work, what are the costs involved , and what type of factoring is the right one for my firm.
It kind of seems simple when you’re first told about it… your company ‘ sells ‘ its receivables to a third party finance firm – you get cash ( the same day, by the way !).
The common questions asked by clients are very predicable to us – what is the collateral for the financing, how does it work, what does it cost, and perhaps most importantly, what is the key difference between this type of financing and a bank business loan.
The clearest way to explain factoring, (also often called ‘ invoice discounting ‘and’ receivable financing ‘ is that you should view your receivables as the essential collateral for financing of this type.
When you sell something you of course have agreed on a ‘ price ‘ with the buyer. In Canada the ‘ price ‘ of this sale is very predictable; it ranges between 1-3% per month. Your ability to have the receivable collected in a more timely fashion therefore reduces your cost of financing.
A good way to think of how this financing works is simply to think of it as a way to ‘ assign’ the rights you have in that A/R to the buyer, the finance firm.
Since you have received the funds for the sale immediately on invoicing your client the right to all the funds of course belongs to the buyer of your A/R.
So all of that is pretty basic, right? Where then are some of the… lets call them ‘ confusion points ‘ in factoring and business financing Canada A/R finance. A couple of key issues come immediately to mind – the finance firm holds back on each advance a certain portion of the funds – this is called the ‘ holdback’. If you are working with the right firm, and believe us there are some wrong ones! then the holdback will be refunded to you as soon as your client pays. The holdback you can typically expect to receive is in the 10 per cent range … any more than that should be a strong negotiating point on the overall facility you set up.
Oh yes, what about the cost of the financing itself. Can that be negotiated? There are some quick ways to determine if you can negotiate better pricing on your facility. In factoring and A/R finance the cost often depends on a couple basics – the size of your monthly A/R, the general quality of your accounts receivable, and your own firm’s general financial condition.
The good news is that if your company is experiencing financial challenges of any sort you probably still quality for business financing Canada factoring. However, the better you are perceived as doing will often affect your ability to negotiate a better rate.
However you might perceive the cost of factoring, you need to always remember that the use of immediate fund allows you to grow your business – in other words you’re finally not the bank for your clients, and that’s a good thing. S
So view factoring and its cost in the context of the tradeoff between growing and expanding your firm with benefits that exceed the cost of this type of financing. Naturally you can choose to simply self finance your firm, but why not grow your business y using external working capital financing generated by factoring. It’s easier to obtain than bank financing, and can be viewed as a long term or a temporary strategy.
Speak to a trusted, credible and experienced Canadian business financing advisor who can steer you in the right direction on this valuable type of financing in Canada.