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How Commercial Factoring works in Canada -Receivable factoring Costs and Benefits

Guest post by: Stan Prokop

Article Overview: It’s not as expensive as you thought! Information on how Canadian business owners and financial managers can utilize commercial factoring to address working capital challenges and benefit from receivable factoring via increased cash flow .

How Commercial Factoring works in Canada -Receivable factoring Costs and Benefits

Commercial factoring in Canada addresses some of the major issue your firm faces everyday in cash flow and working capital challenges. You know the drill - customers have always been slow to pay, they seem even slower these days. Your cash flow requirements change daily as you address working capital needed to finance inventory and receivables, and at the same time manage your investments in ongoing operations, debt payments, commitment to suppliers, etc.

Is there a solution to those challenges, we think there is. Is it as expensive as you may have heard, we are pretty sure it is not.

Commercial factoring is the ongoing sale of your receivables for instant cash. For many customers it always comes down to the rates and pricing they have heard about this type of financing. In Canada those costs range from anywhere from 9% per annum to 1-2% per month. So let's address that cost issue a bit. When many customers calculate their 'all in 'cost of borrowing from banks it is often in the 11% range as an example. So it is important not to get 'seduced 'by your low rate expectations around traditional Canadian bank financing. Furthermore most clients we meet with simply can't meet the requirements, (the banks call them covenants) for borrowing on a revolving ongoing basis for working capital, particularly receivables and inventory. So the conversation around pricing becomes somewhat moot.

Instead of worrying b about the cost of factoring consider the following - If you have money tied up in accounts receivable for , as an example, 60 days, then you are losing the opportunity to receive payment and re invest in your business and increase your overall return on equity . The more quickly you can get paid allows you to reinvest in further sales for your firm, those sales create more profits.

If you complete a receivable factoring agreement you have successfully negotiated a great coup - what is that coup? You have in essence provided your firm with unlimited working capital, because as your receivables and customer backlog of orders grow your cash flow from commercial factoring works lock step with that same growth. The bottom line is that most business owners view cash flow as unpredictable, and commercial factoring removes that unpredictability - you in effect control the cash flow valve - financing all or a part of your receivables when you chose.

Receivable financing is growing all over the world, North American no exception, and certainly in Canada it has been on the rise also. Many clients are in industries which might be viewed by others as 'out of favor '. In general factoring doesn't discriminate - if you have a receivable you can generate cash flow from that A/R - today!

Some of Canada's largest corporations use this type of financing - when it comes to larger corporations fancier finance terms like ' securitization ' are used . Bottom line, General Motors factors, why you shouldn't. That brings up a further point , which is that we do acknowledge that firms that have particular, unusual, or one of challenges are often the mainstream candidates for receivable financing . So your firm may have had some financial losses, be in a turnaround situation, etc - you are still a solid candidate for this type of business financing.

Factoring is the ultimate in off balance sheet financing - you are simply monetizing your receivables and generating cash instantly. The secret of factoring costs, or their perceived costs, is your utilization of those funds. You can use cash flow generated from receivables sales to pay invoices from suppliers and take a discount, or negotiate better terms and pricing for your products .

When you have additional working capital you can grow sales and revenue and increase profits - that financial flexibility is what this type of financing is all about. Sometimes it is a 'bridge 'solution, in certain cases it can easily become your long term ongoing working capital solution.

So whats our bottom line? Simply that you do have choices in working capital solutions. Commercial factoring is one of them. Understanding the true cost of the financing, how it works, and utilizing that cash for the right reasons just might be your best alternative for cash flow longevity.

Speak to a trusted, credible and experienced working capital advisor to ensure you understand the benefits of this unique type of business financing in Canada.

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Article Tags: cash flow, commercial factoring, receivable factoring, working capital



Related Forum Posts
Re: Using factoring companies - [quote="BigJim22":3e4n6n63]I haven't used it myself but can see how it would be valuable for some entrepreneurs. It's hard when you get an order but don't get paid until 30, 60, or 90 days later. But it's also hard to give up $ to the factoring companies![/quote:3e4n6n63] ..."But it's also hard to give up $ to the factoring companies!" Great comment, Jim! However, it's not as hard as it may appear from the outside. Unfortunately, there is no free meal ticket with any financing option (other than gov. grants). The real question regarding the financial viability of factoring is this: I have 2 checks for you; one is for $100 and you can have that one in a month; the other one pays you $80 now plus another $15 in a month. Yes, you net 5 cents less on the dollar with option 2, but if you can take the first $80 now and turn them into $90 or $100 (e.g. more sales!) in a month, then you've not only off-set the loss but actually grown your top and bottom line. Factoring is really much more like running a price promotion. Just look at all the sales events that are happening daily. Companies discount their goods by 10% - 75% only to sell more volume. What are the costs of these programs? Another good example are credit cards! If you as a merchant accept credit card payments from your customer, you're already paying 2% - 5% of each sale to the credit card company. That's the same principle as factoring! Or how many businesses offer a 2% net 10 days discount to their customers, only for them to pay within 10 days? By the way, I can beat those 2% net 10 hands down with our factoring rate! And then there are traditional loans.... you always have to pay back the principal AND interest periodically, no mattter how the business is doing. With our factoring programs there is no principal or interest to be paid back, and the "cost of factoring" is tied to sales and cash flow (i.e., when an invoice actually gets paid and after you have already received the money). The objective truth is that factoring is not the right solution for everybody. Used wrongly or irresponsibly, it can do a lot of damage to a company. But used for the right reason and under the right circumstances, a good factor and factoring program will do miracles for a company's growth (or survival). And in these situations, the $ that go to the factoring company become totally moot. It will truly be the famous win-win. Best, Ralf
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