subject: Factoring In Canada - Canadian Receivable Financing Options [print this page] Factoring in Canada continues to play an important role in the new way of alternative financing for Canadian business . Factoring works best when it involves ' growth ' simply speaking clients tell us that they cannot access traditional financing to handle new sales opportunities .
Factoring is one of the components of asset based lending . It focuses solely on the immediate conversion of your receivables into cash . When this type of financing is combined with inventory financing also it become a non-bank working capital facility .
When businesses choose factoring or receivable financing ( also known as invoice discounting ) as a financing mechanism they have options on how to structure that facility . We strongly recommend to clients that they talk to an expert in this area, one that has credibility, experience, and can guide you through what many term the 'factoring maze '.
Lets recap why you would consider factoring in the first place . Some of those reasons might be:
-to generate additional working capital
-to purchase another firm ,utilizing receivables as a key part of your overall financing strategy
-to reduce payable and improve relatiosn with suppliers
-to access cash flow and working capital without taking on debt ( factoring is not borrowing you are simply monetizing more quickly your largest liquid asset )
-to utilize funds for the down payment or purchase of equipment ( Note we don't recommend to clients that they use short term working capital to fund long term fixed assets
-In some cases your firm might be re organizing or coming out of a difficult period
Factoring works because it address the key problems of what finance folks refer to as the cash conversion cycle you have operating cash tied up in receivables . Part of your overall growth strategy might be to offer extended payment terms to key credit worthy customers . To do that you can utilize factoring by offering those terms, yet at the same time converting the receivables into cash .
Additional cash from factoring can be used to purchase more inventory, which is in term converted into receivables , allowing your cash conversion cycle to come full circle .
Clients ask us what size their firm has to be in order to be considered for this type of facility . The reality is that it works for firms of any size, whether your firm has 250k in sales or 25 Million . ( Even some of Canada's largest firms factor their receivables, you just didn't know that !)
When considering this type of financing option cost is often raised as an issued by our clients . So what does factoring cost . In Canada the cost ranges from 9% per annum to approx 2-3% per month . Clients focus on these rates as annualized interest costs, when in reality the best way to look at them is reduction in gross margin with offsetting benefits of immediate cash flow and working capital . Sitting down with clients we can often prove that over a long period the cost of this type of facility can be significantly offset by the benefits , which include :
-Immediate cash flow and working capital in an unlimited fashion ( if you have sales you can always finance those sales you don't have a limit per se
-Better supplier relations
-Ability to offer extended terms to customers that generate good profits for your firm
-The ability to now take supplier discounts and take advantage of better pricing based on your ability to pay cash
When evaluating your options the best advice we can share is to understand whats happening in the Canadian factoring market . Work with a trusted advisor who can take you through the various industry nuances such as :
-Recourse factoring
-Full notification
-Non notifications
-Annual contracts or open contracts
-Pricing based on your facility size and customer base,
Etc !
In summary, naturally Canadian business owners and financial managers realize there is no one single holy grail of business financing . But if you want immediate cash flow, no focus on your balance sheet by the factor firm, better supplier relations, ability to finance your business as you grow, etc .. then you should consider factoring as an option . The weight of evidence might just suggest that factoring is the right financing right now! for your business .
