From a money losing strategy? Before you question our sanity consider this ! Everyday thousands of firms
in Canada are selling their
receivables at a loss, they know it, and they still have chosen to tap into one
of business financing Canada's
best working capital and cash flow strategies, despite the cost and apparent loss!
We're talking about accounts receivable financing, and why those thousands of Canadian business owners and financial managers utilize an A/R finance loan (it’s not a loan per se) to fund their companies.
How many Canadian businesses have had their business credit lines pulled or reduced in last several years? We wouldn’t want to count. Getting that letter in the mail from their financial institution either seemed like a mistake, but more probably a shock.
Naturally there are a hundred reasons why their business credit lines were pulled/reduced. It could be external lawsuits against your firm, failing profits, your inability to produce timely financial statements, etc, etc. And believe us, we're not taking the side of Canadian chartered banks, which are among the best run in the world, the bottom line, and any well run financial institution certainly has its rules and policies... but.. bottom line, you need a new financing solution!
Our recommended potential solution. Lose money. But lets clarify - consdier an accounts receiving financing strategy . Your receivables are sold, as you generate them at a loss . A loss? But this loss is then turned around into a working capital and cash flow bonanza, as you now are in ability to be liquid, sell more, generate new profits previously unattainable, and yes, survive.
Receivable finance has been the savior of thousands of firms in Canada, from start up to even some of our larger corporations. While banks, credit unions and other firms have slowed down in commercial financing the receivable finance industry has stepped in to take its place.
So, some really key points. A/R financing is not a loan as we mentioned, your firm incurs no debt. The Canadian commercial receivable finance industry is generally unregulated - the A/R firms buy your receivables at a discount (hence ... your ' loss” and therefore provide you with unlimited working capital as your sales grow. In general it’s recommended your firm have stable or growing sales when this strategy is implemented.
So what about those ' losses ' and the cost. Quite frankly that’s where we spend most of our time with clients , explaining the concept of invoice discounting, or accounts receivable financing loan finance . Your A/R portfolio is financed by your A/R being sold at a discount - In Canada that discount is in the 2-3% range. That 2 -3% is the loss we've referred to. Simple example, you have an invoice for 10,000 - you receive 9800 dollars when you finance, or sell that invoice. You've just incurred a loss, in reality a financing expense.
But, consider this! Here's the essence of our message today, your firm no long has to wait 30-60, or 90 days for cash flow out of that invoice. You can also use the cash to take a 2% discount with your key supplier, and you might also give him a call and say you'd like a 5% price reduction as you are prepared to give them a cheque as soon as they deliver product to your door. You can also now take on that large order you previously were unable to compete with against competitors who have been taking all your business. And those are new incremental profits to your firm via that new business.
Hasn’t our money losing recommendation just turned into a mini profit machine for your firm? We think it has. So yes, your financing costs may double, but the benefits we think are very clear.
So, the bottom line? As usual, we're keeping it simple. Consider all the costs and financial implications of an accounts receivable financing strategy. Speak to a trusted, credible and experienced Canadian business financing advisor who can assist you in putting together a facility to work for your Canadian company.