Small- and medium-sized businesses in Canada are almost always facing a financial challenge when it comes to funding to both grow, and yes even survive. However unfortunate, the reality is that thousands of firms have somewhat limited options to meet the funding challenges of their business.
Is there a solution? The answer, simply, is yes. One of those solutions is accounts receivable financing via a factoring company or invoice discounting firm.
So why do those thousands of firms consider A/R financing as an alternative to term loans, or even the costliest method of financing, giving up part of your owner equity? Simply because they are in a position, with the right knowledge, to use, rather … monetize one of the largest, if not the largest asset on the left hand side of their balance sheet, their receivables.
A/R financing simply speeds up cash flow and allows you to finance growth by monetizing your receivable portfolio, in whole or in part. The process itself is simple. It’s who you partner with and how you structure your A/R financing (and what you pay for it!) that becomes somewhat of a challenge for Canadian business owners and financial managers.
In Canada, two types of working capital finance via invoice finance are available. Under the most common scenario, you “sell” your invoices to your factoring company – they advance you the cash, pretty well the same day, and they begin a process to collect that receivable as it becomes due from your client.
The other alternative, less common but an absolute recommended solution, is that same sale of your receivables, but with you doing all the billing and collecting. In both circumstances, there is essentially no limit on the amount of financing you can attain. Naturally, you have to have the sales to support that financing, but more often than not with most clients, sales isn’t the problem, financing is!
If we had to say what confuses or concerns the majority of first-time clients in accounts receivable pricing, we would have to put it down to two issues, the cost and the daily mechanics of this financing vehicle.
So what’s the best way to both understand and justify the cost of A/R finance? This is where the rubber hits the road, so to speak. The best way we can explain it to a client is that you have to look at the cost of this working capital from a couple of different angles. One is that you are already carrying accounts receivable, so you have a cost. If the clients are low margin profits to you and taking a long time to pay that cost is significant, often as much or more than the cost of A/R finance.
The other way to look at it is that there is a large value to cash in the ongoing operations of your firm. You can maintain solid relations with suppliers and vendors by paying them promptly, taking advantage of discounts, as well as capitalizing on the buying power of your new found cash. A typical discount on, say, a $100,000 invoice in Canada is $2,000. Simply speaking, it has cost you $2,000, on a 30-day basis to receive $98,000 for your invoice. But consider this, take that $98,000 now and negotiate better pricing of say 3 percent less on your vendor purchases, and pay your vendor on delivery or via a 2 percent prompt payment discount. That combination strategy has saved you 5 percent. Plus, you’re “liquid.” Talk about a winning strategy.
The time it takes your clients to pay, as well as your monthly volumes, ultimately dictate your pricing in accounts receivable financing in Canada.
As we said, the benefits of using a factoring company are quite clear. Unfortunately in Canada, the method in which fees and benefits are presented often lack clarity to the first time A/R finance user. Want clarity on pricing and benefits of accounts receivable financing in Canada? Consider talking to a trusted, credible end experienced Canadian business financing adviser for information on this innovative working capital vehicle.