Tweet

A Receivables Financing Counterpunch – Making Factoring Cost Work For Your Company

Guest post by: Stan Prokop

Article Overview: Information on receivables financing in Canada . How is factoring cost calculated in a manner that the Canadian business owner and financial manager can truly understand the real cost and benefits of this growing financing tool . What is the real cost of having unlimited cash flow and working capital . Why Canadian Business Has Problems with the Cost of Financing Receivables

A Receivables Financing Counterpunch – Making Factoring Cost Work For Your Company

How much is it? No we aren’t in line at a department store, we're sitting with our clients who are always asking what the true cost of factoring receivables is and if a receivables financing facility is their real solution for working capital problems. They ask other questions also, such as how the facility works and what is the best type of facility for the Canadian business marketplace, so we we'll cover those off also .

We don’t think there is more of a mis understood business financing in Canada, notwithstanding the fact that receivables financing is growing in popularity traction everyday. The biggest stigma around the topic is really the true cost, and we use the word true cost because many Canadian business owners and financials managers simply don’t understand the components of that true cost, and moreso, how these costs can be significantly offset and reduced.

We'll point out that coming up the rear fast and furious behind true cost are the issues of how the facility works and what type of facility is the best one in Canada - as there are several types.

To properly address our issue lets quickly define our subject - factoring, ( also called receivable discounting and invoice financing ) is simply the sale of your receivables to a third party firm, that firm providing you with immediate ( and we mean same day!) cash to finance your business

One of the misconceptions clients have around pricing is related to the fact that you receive (depending on who you are dealing with) 80-90% of your invoice amount in a receivables financing scenario. This must be taken into account when you are looking at total factoring cost.

One thing that constantly disturbs us is that the terminology mumbo jumbo that many factor firms use when they are offering you pricing on your facility. That’s why it makes total sense to talk to a trusted, credible, and experienced Canadian business financing advisor that will work with you through the (industry created) maze of factoring, factoring cost, and day to day paper flow.

You can quickly and easily focus in on the true cost of factoring by simply keeping in mind three things that you need to know - they are:

1. The percentage that you are advanced on your invoice (refer to our previous comments)

2. The discount rate charged on the advance

3. The length of time that you typically collect your receivables in

Most business owners are not readily facility with their DSO, their ' day’s sales outstanding '. You have to be, because it’s an ongoing measure of the time it takes to collect your receivables in days. It’s calculated simply by taking your receivalble on an annual basis, multiplying them by 365 (days) and then dividing that number by your sales for that time period.

Therefore, if you know your collection period, and get an honest, clear answer on our three points you can easily determine the cost of factoring.

Let’s give you a clear example: Your factor firm advances you 80% of your invoice. Their discount rate is 3%. So if you are in the lenders shoes your annual return on the client (that’s you!) is simply: Discount rate % times 365 days Divided by number of days invoice is outstanding.

In Canada that rate is typically going to work out to be in the 1.5-3% per month range depending on the lenders perception of the size and quality of your accounts receivable portfolio.

Is that expensive financing? You tell us, because if you take into account the receivables financing facility provides you with unlimited cash flow to generate sales and profits, and that you can use the cash to offset financing costs, well... we dont think so .Costs can be offset by using the funds to take supplier payment discounts, and purchase in larger volumes and better prices re your inventory needs, etc.

Speak to that trusted, credible business financing advisor we spoke of, he or she will guide you through the receivable discounting maze and set you on course with the right facility at a price that makes sense to you.

Related Articles
  Working Capital Financing - 10 Reasons Not to Factor Receivables in Canada
  The Only Disadvantage Of Factoring Receivables And Why Confidential Accounts Receivable Finance Works!
  Real World Advice on Cost of factoring of receivables in Toronto – Board the Receivable factoring Bus!
  How The Right Factoring Firms in Canada Can Provide Financing Factor Facilities Confidentially
  What’s the cost of confidential invoice finance and how does receivable factoring work?
  Working Capital Factoring – Invoice Factoring Canada
  What Does Accounts Receivable Financing Mean? How does it work in Canada?
  Factoring – Financing Canadian Receivables
  Factoring Finance – Don’t Make This Mistake when Considering a Factoring Program in Canada
  What to Tell Your Customers about Nurse Staffing Account Receivables Factoring
  Has Your Company Overlooked the business financing of receivables or Factoring as a Working Capital strategy?
  Factoring and Accounts Receivable Financing In Canada
  The Benefit of Consumer Receivable Financing
  How To Obtain The Best Receivable Financing In Canada and Why Factoring Receivables Works Best When Its CID!
  Your Choice - Right Way / Wrong way ? Canadian Accounts Receivable Financing & Business Factoring
  How To Get The Best Factoring Financing From Your Receivable Investment And How Factoring Firms Differ in Canada
  Factoring in Canada – Receivables Financing
  Factoring in Canada – Working Capital Now
  Benefits Of Invoice Factoring And Factors That Affect The Cost Of Factoring Receivables
  Receivable Factoring – Three Things You Didn’t Know About Factoring Services

Article Tags: cash flow, factoring cost, receivables financing, working capital



Related Forum Posts
How to valuate a business - Hi Garth - here is how we did it at Northern Crown Capital when I was helping them raise venture capital for Toronto-based entrepreneurs. Assume the start date is 2003 so 2008 projections are 5 years out: How Northern Crown Capital Valuates a Business 2008 Financial Projections Earnings Before Tax $5,865,000 Tax Rate 42% Taxes $2,463,300 Net Earnings $3,401,700 Amount Seeking to Raise Today $3,500,000 Discounted Value of Future Opportunity, 5 Years Out 2008 P/E Ratio 15 Value of Company in 2008 $51,025,500 Discount Rate Applied 30% Year 2008 $51,025,500 Year 2007 $35,717,850 Year 2006 $25,002,495 Year 2005 $17,501,747 Year 2004 $12,251,223 Value of Company at Investment in 2003 $12,251,223 Less: Investment Amount $3,500,000 Present Value $8,751,223 Discount for Risk & Private Company 40% Less: Discount for Risk & Private Company $3,500,489 Private Company Value $5,250,734 Present Value (What the Owner Keeps) $5,250,734 60.00% Financing (What the Investor Gets) $3,500,000 40.00% Total $8,750,734 100.00% I hope this helps!
Making Money in 2011 - Hello forum members! As we draw closer to the new year I thought it would be appropriate to change the title of our forum category "Making Money in 2010" to "Making Money in 2011" - I'm looking forward to some interesting discussions and wish everyone a prosperous New Year!
Evaluating a franchise: questions to ask yourself - Here are a few questions you may want to ask yourself before buying a franchise: - How much capital do I have to invest? - What is the value of my liquid assets? - Do I require a specific level of annual income? - Am I interested in pursuing a particular field? - Am I interested in retail sales or performing a service? - Do I want a part-time or fulltime opportunity? - How many hours am I willing to work? - Do I want to operate the business yourself or hire a manager? - Do I want to have employees? - Do I want to have inventories? - Do I want to have Accounts Receivables? - Will franchise ownership be my primary source of income or will it supplement my current income? - Would I be happy operating the business for the next 10 years? - Would I like to own several outlets or only one?
No fee biz banking - I miss Bizsmart - it was a great no fee banking option for businesses but I guess the company wasn't making much returns and had to shut down. Are there any other no fee or Low Cost Business banking options still available in Canada?
Research & Dev Tax Credit - at No Cost (Canada) - Brian, I have a colleague that can provide you guidance and even assist in maximizing a R&D Tax Credit from the Government of Canada (If you are Canadian). All this at No Cost to You. I know her well and have referred other people to her. She's got plenty of experience in the field. If you're interested (anyone else on this forum too) just send me a PM and I will share her details with you.


Share this article with your friends. Fund someone's dream.

Leave a comment below or share on the left and you'll help support entrepreneurs in Africa through our partnership with Kiva. Over $50,000 raised and counting - Please keep sharing! Learn more.

Newsletter

Get advice & tips from famous business
owners, new articles by entrepreneur
experts, my latest website updates, &
special sneak peaks at what's to come!

Name:
Email:

Popular Articles

Sales is a Flawed Model

Igniting Your Unstoppable Business Destiny

Suggestions

Email us your ideas on how to make our
website more valuable! Thank you Sharon
from Toronto Salsa Lessons / Classes for
your suggestions to make the newsletter
look like the website and profile younger
entrepreneurs like Jennifer Lopez.