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Working Capital Factoring – Invoice Factoring Canada

Guest post by: Stan Prokop

Article Overview: Information on how small and medium size businesses in Canada can generate working capital and cash flow via invoice factoring via a asset based borrowing.

Working Capital Factoring – Invoice Factoring Canada

Working Capital via factoring continues to be a viable solution for Canadian business owners and financial managers. The process at first glance is quite simple - your firm 'sells' its invoices to generate immediate same day cash for those invoice assets.

Clients ask us how this is different from a bank operating line of credit based on receivables. Simply speaking the difference is simply the method in which the asset - the receivables, is secured. In a Canadian chartered banking type arrangement your receivables are 'assigned ', not 'sold' to the bank. The bank holds that assignment as a security for their advances on your receivables - they do not call the security unless your firm defaults on its obligations with the bank.

For those firms that can achieve bank operating line of credit financing in Canada that solution is absolutely the most cost effective - yet in many instances Canadian firms cannot achieve the amount of credit they need because the receivables financing is closely tied to your balance sheet and income statement from a credit perspective .

The majority of factoring ( also known as invoice discounting ) in Canada is done on a recourse basis, which simply means that although you get immediate cash for your receivables you are still responsible for any bad debts relative to your customer base .

In Canada most of factoring is done via a U.S. based model of doing business, which has the factor firm essentially verifying and collecting those invoices from your customers. We advise our clients on an alternative method, known as non notification factoring. This type of facility, which we term as a working capital facility, allows you to bill and collect your own receivables and avoid some of the negative stigma that Canadian business owners attach to factoring.

Factoring should most often be considered when your business is growing quickly or has large orders from generally credit worthy customers. Your ability to turn your receivables over more quickly will lead to more sales and greater profits. The cost of factoring is significantly higher than bank financing, but your ability to make use of the cash flow to buy smarter, take advantage of discounts, and purchase and resell more inventory faster significantly offsets a very large part of the cost of factoring in Canada, which can range anywhere from 1-3% on a monthly basis . We caution clients to view this cost as an operating expense as opposed to a financing or interest charge, which allow them to much better rationalize moving to this type of working capital facility.

In summary, factoring is an alternative to bank receivables financing. The facility, when properly set up, allows you to immediately monetize a large asset, your receivables. The best type of facility in Canada, in our opinion, is the non-notification type facility, allowing you to cash flow your receivables similar to a banking arrangement. When properly utilized the facility can help you grow and profit from faster working capital turnover.

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Article Tags: cash flow solutions receivables, invoice factoring Canada, working capital factoring



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