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Invoice To Cash – Factoring for Canadian business

Guest post by: Stan Prokop

Article Overview: Information on on how a Canadian company can convert an invoice to cash for part or all of its accounts receivable portfolio . Also discussed is an overview of how factoring works in Canada versus the U.S. factoring market . Suggestions on how to get a solid working capital facility in place .

Invoice To Cash – Factoring for Canadian business

Converting an invoice to cash is a top priority for Canadian business owners and financials managers. Factoring continues to slowly increase it’s presence in the Canadian market place, and some of the largest corporations in Canada actually successfully use this type of financing strategy. However for the purposes of our information shared here we will focus on the whats, whys and how to be of factoring for small and medium sized companies in Canada.

Once a business owner both understand and starts to ‘ buy into ‘ this type of financing the only challenge at that point is ensuring that they enter into the right type of facility .

The Canadian factoring market is significantly different from the U.S. and European markets where factoring originated. It is therefore important for Canadian business owner who consider this type of receivable financing to know their options and to have a solid sense of how the financing works.

Canadian factoring companies fill the gap when a firm cannot obtain satisfactory receivable financing from their Canadian chartered bank. Many clients tell us they do have some for of bank financing in place, but it essentially does not meet their needs re growth and facility size. In many cases clients have had a challenging 2008-2009 and have no financing facilities in place whatsoever. Then there are of course starting up firms who virtually have no ability to qualify for standard Canadian operating facilities that are enjoyed by more larger and established firms.

Factoring works for your firm when you have decent receivables but there are issues on your balance sheet and income statement that prohibit you from obtaining the amount of financing you need on an ongoing basis . This working challenge is further exacerbated when you have large new contracts or volatile growth spurts based on the uniqueness of your industry.

There are two types of factoring in Canada, ‘notification factoring ‘, and non- notification factoring. Both work well if you understand how they are structured and priced, however we favor non notification factoring in our recommendations since we feel it more closely suites the Canadian way of doing business.

In notification type factoring the process is very simple and mechanical:

- Your firm invoices your customer

- You generate an invoice

- You receive a large, almost same day cash advance against that invoice (typically 90%)

- Your factor firm verifies the invoice with the customer prior to disbursing funds

- The factor firm more often than not collects the invoice, an remits to your firm the remaining balance due yourself, less their financing fee

Non notification factoring is dramatically different - with that type of facility more due diligence is spent on your firm and its way of doing business, invoicing, creating proper financial records, etc. Your company bills and collects all its invoices, and you receive funds immediately after you ship and provide proof of delivery.

Factoring pricing in Canada has dramatic price swings. Factoring rates range from 9% per annum to 2-3% per month. Factors that determine your price are the over all facility size, your usage of the facility, the overall quality of your customer based, and ,unbeknownst to your firm, how the factor firm itself is funded, usually either privately or institutionally .

In summary factoring works in Canada. Choosing the right facility is usually a larger leap of faith than buying into the concept of this type of financing. Speak to a trusted, credible and experienced advisor in this area to ensure you understand the benefits of this valuable and popular method of Canadian business financing.

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Article Tags: factoring, invoice cash, invoice to cash



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