subject: Factoring For Working Capital Canadian Solutions [print this page] Factoring for working capital needs in Canada is quickly becoming a recognized a traditional strategy for cash flow financing. We say traditional because for many years factoring in Canada was clearly view as a non traditional and alternative financing strategy.
The simple explanation around this financing tool is that allows Canadian firms to access financing and cash flow immediately to smooth out the ups and downs of any companies business cycle.
Firms in Canada utilize the strategy for short term working capital needs. Factoring is not a term loan. Most business owners don't realize that utilizing factoring as a financing strategy brings no debt on the balance sheet. We could very comfortably argue that in fact your balance sheet looks better when you use this financing tool. It in effect allows you to satisfy short terms needs for payroll, purchase of inventory, etc.
If utilized properly (more about that later) there are significant benefits to a factor financing strategy. Some of these benefits include:
-The ability to purchase more inventory on a short term basis at preferred pricing and quantities
-Access a working capital credit facility that many times is significantly higher than what your firm could achieve with bank financing
-Increase sales with the right customers by offering better payment terms than your competitors (cash flow is king for your customers also!)
-Take advantage of payment discounts offered by suppliers many firms offer discounts such as 2% 10 days by taking advantage of these discounts you can remove a huge portion of your factor financing discounts
We can't over emphasize the need to ensure you understand the Canadian factoring market. It differs significantly from the U.S., and some enhancements to a factor financing strategy can super charge your cash flow. For instance, by putting in a combo of an A/R facility and an inventory financing scenario you can often at least double all the liquidity your firm had previously. That's a powerful cash flow statement.
Also, for firms that are factoring now , we are quite convinced, after talking to clients , that they either don't understand factoring pricing, or in some cases have been mis- led about what they are really paying for this type of financing . Even improving your factor facility by or % can drive profits straight to the bottom line. Clients are therefore encouraged to seek out a trusted, credible, and experienced advisor in this area who can help them achieve the right factoring facility for their firm.
We also encourage clients to seek out factor facilities that don't lock you into long term contracts, as our experience indicates your firm might be a candidate for other forms of financing at some point down the road.
We spoke previously of properly utilizing a factoring financing strategy. By that we simply mean that you should ensure you understand what you are paying , as some firms have methods of presenting factoring in a method to confuse customer about overall ' all in ' cost . Things to look for are clear per Diem pricing you want to ensure you are only paying for what you use in your facility. Open contracts make more sense for your firm, why would you let a finance firm lock you into a contract. Other things to look for are the advance rates on your transaction.
Most business owners understand the basic mechanics of factoring they are of course:
-your firm ships or delivers your goods and services
-you invoice and receive same day cash for your invoices usually in the range of 80-90%
-Your customer pays the invoice and at that time you receive the original amount that was held back , minus the factoring discount fee
U.S. Based firms that offer factoring in Canada are heavily involved in the entire process that we just walked through. They quite often will insist on verifying your invoices, talking to your customer re payment, etc. That is why our recommended solution to eliminate this intrusiveness is a factoring or working capital facility that allows you to bill and collect your own receivables.
In summary, factoring for working capital is a proven strategy. The challenge simply becomes being an educated business owner. Find out what benefits clearly apply to your firm when utilizing this type of financing, and investigate the best facility for overall ease of doing business and pricing. That's cash flow 101! For working capital factoring.
