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Is Factoring A Solution for my Cash Flow Challenges in the Canadian Business Financing Environment?

Guest post by: Stan Prokop

Article Overview: The article provides insights into why Factoring is a solution for Canadian firms to generate cash flow in the current challenging business financing environment

Is Factoring A Solution for my Cash Flow Challenges in the Canadian Business Financing Environment?

Business owners and financial managers today are keenly aware of cash flow challenges in the current business environment. The 2008-2009 world economic crisis changed Canadian firm's ability to get liquidity via business borrowing.

Banks, Business credit unions, trust companies, life insurance companies, third party independent finance companies, etc - you name it, each institution had its own challenges which translated to greater challenges for the Canadian business borrower.

Small and medium sized firms are where the greatest 'gap' is in business financing.

So who is offering cash flow and receivable financing in Canada. Most business owners have heard that it's an expensive solution - It is more expensive, quite a bit more expensive, but it works. Most firms will not factor or finance their receivables forever. It is a classic interim solution prior to a customer regaining traditional Canadian chartered bank financing status again.

Factoring has been much slower to catch on in Canada. It is generally accepted world wide, and has been in practice for hundreds of years in Europe. Canadian business owners aren't 100% aware of two things:

1. Who is providing this service?

2. How does it work / what are the costs?

The main advantage to Factorings current popularity is its ability to turn a receivable into cash immediately. Receivables are sold, or assigned to the factor firm, and cash is deposited immediately into the company bank account.

We spoke of methodologies varying differently from firm to firm. In certain cases the company will be required to finance all of its receivables, in some cases the facility is set up , potentially, as a ' bulge' with a current lender, most often a Canadian bank . This is probably the best strategy of all, but frankly it is the most challenging to set up as the Canadian chartered banks are reluctant, because of size and security, to be a partner to this type of arrangement. We spoke of factoring being more expensive. The factor lending firm views the cost of the service and financing as a discount rate, or fee. (We also thing that's the best way to look at it). Canadian firms don't look at it that way; they view it as an interest rate that comes with a much higher cost of borrowing. Therefore a facility that has a combination of bank and factor lending has an overall lower cost of borrowing and maximum borrowing power

Factor firms have very levels of involvement in your business when you have such a facility. The factor financing can have a strong level of daily ' intrusion' into the Canadian firms business - the factor might insist on delivering invoices to your customer, notifying them of the financing arrangement, and yes, you guessed it, even calling the customer and collecting the receivable . Naturally in a perfect worked most firms would rather perform these functions themselves as part of the overall 'customer relationship '.

Factoring ('cash flow financing ' ) works for any Canadian firm that has eligible accounts receivables. These receivables must be valid, current, and earned. By 'earned' we mean that your company must have delivered in full, and the customer has accepted, your product or service.

The greatest danger of factoring is that the firm does not use it for the right reasons, it is the ultimate cash flow / working capital alternative, it should not be used for long term debt, asset acquisition, etc.

In summary, if our firm has business financing challenges factoring and cash flow financing will allow you to turn receivables quickly, allowing your firm to shorten your operating cycle . You will collect faster and be able to start your business cycle all over again . To quote Martha Stewart ' that's a good thing '!

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Article Tags: business financing, canadian business, cash flow challenges, cash flow financing in Canada, factoring, receivable financing



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Invoice discounting Invoice Discounting can be Confidential or Disclosed; it depends upon the strength of the financial information. The service is the same as Factoring, except that the sales ledger administration and the debt collection is the responsibility of the client and not the Factor. Pre payment of the approved sales invoice is still up to 95% and the factor will still have a first charge on the book debt and therefore own the debt. This service can also have credit protection cover. All sales invoices need to be for a business to business debt, and some proof of delivery is generally required. Trade Finance This is funding provided against stock purchases, signed contracts and orders whereby the funder will prepay a certain percentage of the value Pension fund It may be possible to use your pension funds for a loan back to the business What do u think about it?


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