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What is the Best type of Factoring and Receivable Financing Facility for Canadian Firms?

Written by: Stan Prokop

Article Overview: The article provides the Canadian business owner and financial manager with insights into Factorings growing popularity in Canada as an alternative business financing mechanism .

What is the Best type of Factoring and Receivable Financing Facility for Canadian Firms?

Everyone is talking about 'factoring' these days, even the people who don't really understand it! While one could maintain that factoring has been around for a number of years in Canada it is absolutely getting more prominence.

We feel that it is getting that prominence for potentially all the wrong reasons, namely that in the current Canadian economic and banking reality financial, cash flow and working capital facilities from traditional institutions such as the banks have been significantly curtailed .

So lets do a basic primer on factoring , and then discuss how it's similarities and differences from what is offered in other parts of the world , and why it works and when it is problematic . We also have a solution for some of the business owner challenges associated with factoring and receivable financing.

Factoring has been around for hundreds of years (if not longer!). What's the basic premise? It's simple. You sell one, (or a number) of your receivables, and you immediately get cash. In our article we will continually try and point out some of the nuances of factoring that get Canadian firms into trouble - here is the first one - when you sell your receivable make sure you understand whether its recourse or non recourse . By that we mean that on a recourse deal if your customer never pays, goes bankrupt, etc you are responsible for paying back the finance firm. If you arrange what is known as 'non-recourse' financing the finance firm is responsible for the loss, not you. As you can imagine non recourse factoring is a bit more expensive, as you are eliminating all collection risk.

Let's touch on another relatively unknown point in factoring, and that is that it is a key component of a potential based lending']);"> asset based lending strategy. based lines of credit']);"> Asset based lines of credit are available to Canadian firms - these facilities are generally not with our Canadian chartered banks and are offered by very specialized firms. Not only can the business owner get financing for its receivables, but inventory and equipment and real estate can be included also. As the business owner knows, inventory and equipment are crucial parts of working capital, inventory more so.

When businesses factor their receivables in Canada, they, for the most part, are no longer involved in the collection function of those receivables. Two very important points come into play here -

1. You have just eliminated cost, personnel, and time involved in collections - ( that's a good thing
2. You have just handed over part of the key customer relationship to a third party with whom your customer has no previous knowledge, dealings - (That we feel, is a bad thing!)

In summary, we have touched on a few key basics revolving around factoring and receivable financing in Canada - i.e. the history of factoring and why its growing more popular ; and, in addition we have focused on some ' nuts and bolts ' of a factor / receivable financing offering with respect to some positive and negative aspects of such an alternative financing facility . In future articles we will discuss additional pros and cons of this relatively new type of financing in the Canadian landscape.

Related Articles
  Factoring and Receivable Financing in Canada
  Is there an Alternative Solution to Factoring for Canadian firms with working capital Challenges ?
  How To Get The Best Factoring Financing From Your Receivable Investment And How Factoring Firms Differ in Canada
  What’s the cost of confidential invoice finance and how does receivable factoring work?
  What Does Accounts Receivable Financing Mean? How does it work in Canada?

Article Tags: business financing, canada, canadian business owner, receivable financing



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