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Factoring In Canada – What is the best rate?

Guest post by: Stan Prokop

Article Overview: Information on factoring and best rate in factoring based on your business financing requirements for receivables financing for cash flow needs.

Factoring In Canada – What is the best rate?

Factoring In Canada - more firms are doing it and as this type of financing becomes more popular many business owners quickly discover they either do not know the rate they are paying, and in many cases are looking for a more competitive rate.

We are assuming in our share of information that you understand the basics of factoring - i.e. the sale of your receivables - It is most commonly used with high growth firms that cannot obtain he amount of traditional financing they need to grow; utilizing the working capital and cash flow derived from a factor facility.

There are several key factors that influence your pricing on factoring - we would also point out that many customers refer to the factoring rate as a ' interest rate ' , while the industry itself does not position the cost of factoring as borrowing , or a loan, so therefore it is more commonly referred to as the discount rate . That is a small nuance but important for many business owners to understand. We recently met with a customer who felt his 'rate 'on factoring transactions was 3% / annum, when it fact it was closer to 24% per annum. Again, as we had said, the lender positions that 2% / month as a 'discounting fee for their service.

What other factors are important in either determining if your factoring pricing is competitive, or simply to determine what your rate in fact is? Size and volume are also critical factors in your overall facility rate, and other factors include the credit quality of your customers. Also, the factoring industry in Canada is very fragmented - by that we mean that the actual factoring firms are in the following categories:

• - Small and local
• - Medium size and large - Canadian owned ( few and far between)
• - Branches of American and European firms where factoring originated and is more popular and well known as a alternative financing vehicle

So why is it important to understand how a firm is structured and who owns it? It is probably one of the least focused on areas when Canadian business owners or financial manager consider a factoring facility. They don't necessarily care who they are dealing with, they just want a factoring facility.

What are then the differences between firms that can make your company a happy factoring client versus a dis-satisfied or uninformed client?

A solid advance rate in Canadian factoring is 90% - if your firm is not getting that amount of advance on each invoice we believe you do not have an optimally priced facility. Pricing in our opinion tends to be more aggressive if your firm has a monthly facility size of 250k - Facilities below this size tend to be higher priced and have less aggressive advance rates. The general overall quality of your receivables helps to determine final pricing.

So what is the range of discount rates in Canada - in our experience they are between 1- 4% per month? This is a huge range and only re-enforces the point that many firms do not understand where they may fit into the overall price positioning of the factor facility.

Finally, we would also point out that there are a number of miscellaneous fees that firms charge that significantly alter the final fee. These are buried deep in the body of term sheets and approval facilities, they seem nominal in nature, and add up to large differences in pricing.

Whats the best advice? Find an experienced, credible and trusted business financing advisor who can ascertain your optimal factoring facility relative to discount rate, terms, and structures.

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Article Tags: best rate in factoring, business financing, Factoring in Canada, receivables financing



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