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Factoring and Invoice Discounting As an Alternative Financing Method For Canadian Firms

Guest post by: Stan Prokop

Article Overview: The article discusses factoring, also known as invoice discounting as an alternative financing strategy for business owners.

Factoring and Invoice Discounting As an Alternative Financing Method For Canadian Firms

Canadian small and medium sized firms do not have the financing alternatives enjoyed by their larger, often public company counterparts. As an example many larger corporations use the concept of securitization as a method of financing working capital and enhancing balance sheets. This type of sophisticated financing allows firms to improve liquidity and satisfy lender loan covenants.

Smaller firms, usually do to cost, lack of financial sophistication, and size are unable to utilize such alternative financing. Additionally, in the current 2009/2010 financial environment many firms are struggling with their ability to maintain bank credit facilities, let alone increase them!

Therefore factoring continues to grow and become more widely used in small and middle sized firms in the Canadian business environment.

The factoring or 'discounting' of receivables allows firms to convert working capital into immediate cash. This comes with a cost which we will also discuss. Unbeknownst to many Canadian firms they have the option of selling some of their receivables, at once or on an ongoing basis, or all of their receivables - again, on a one time basis or ongoing.

It is critical to note that when a firm sells, or factors, or discounts (they all mean the same thing) they retain no ownership or interest in the receivable. Depending on how the factoring or working capital facility is structured they may or may not have responsibility for the ultimate non- collectibility of the account. Lenders address that issue in a variety of manners.

As we talked about previously, larger corporations utilize this process in a very large and serious way. Millions, rather Billions of dollars are packaged up, put into special investment vehicles called ABCP or SPV ( asset backed paper ) ( special purpose vehicle ) and then sold to corporate and institutional buyers based upon the over all quality of the total assets.

Smaller and medium sized companies in Canada aren't able to enter to large multi year arrangements, with lower costs, that would allow them to achieve the benefits of a true securitization.

Smaller and medium size firms have the ability to, either with their banks (possible, but doubtful) or independent finance firms, sell receivables under a factoring or discounting agreement. This means they don't have to spend time and costs on setting p those asset backed commercial paper trusts, deals can be structured uniquely to the customers situation, and their is a lower cost and no reliance or need for rating agencies, lawyers, etc.

If used on a regular basis the factoring or invoice discounting process continually generates new working capital, allows the customer to generate better rates as time goes on, and, most importantly, relieves the financial stress of managing working capital.

It is very important to note that smaller companies have some distinct choices that on occasion the larger firms don't have. They can on a one time basis, or periodically choose to utilize this alternate financing method.

We discussed previously the company's responsibility around the invoice not being ultimately collected. If that is the case, 99% of this type of financing in Canada is done on a ' recourse ' basis. This means the customers has to pay back the lender, or replace the invoice with another one of equal value.

Typically the costs in Canadian receivable financing and factoring vary greatly. Rates range from 1 - 3% on a monthly basis. Most customers view this as an ' interest rate ', while the lender tends to view it as discount rate.

Generally the factoring (receivable discounting) facility can be set up in a couple of weeks. As we can imagine it takes the larger corporations many months (and many thousands of dollars) to set up their large dollar securitization facilities.

The factoring facilities are set up efficiently for the smaller and medium sized Canadian firm, and allow a company to grow with unlimited working capital access.

In summary, more and more firms are turning towards factoring (receivable discounting) to manage their working capital and liquidity challenges. Firms are strongly advised to search out experts in this area who know the Canadian marketplace, as it differs substantially from the U.S. environment in this unique method of alternative financing.

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Article Tags: alternative financing in Canada, factoring in Canada, invoice discounting in Canada



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