subject: When Do You Need Ar Financing And Is It Really That Simple And Effective ? Factoring In Canada [print this page] No secret that Canadian business owners and financial managers in the SME (small / medium enterprise) sector in Canada are constantly seeking simple and effective business financing solutions in Canada. That's where AR financing comes in it's assistance for the constant need for cash flow.
We don't think we can count the number of clients we meet that always bemoan the lack of cash to run their business. And borrowing via some sort of term debt solutions isn't exactly what they consider a solution.
Enter ' FACTORING '. In the right circumstances (more about that later) its time efficient and not really any sort of complicated approval process. The fundamental solution it provides is very simple - your clients owe you money but you would rather have that funding... today!
Although conceptually its similar to a business bank line of credit the difference is that the documentation surrounding this Canadian business financing solutions essentially has you selling those receivables, not just ' borrowing ' against them, as you would with a chartered bank in Canada.
You get the funds immediately, basically you're able to cash flow the receivable as soon as you generate it and are able to document that you have delivered your product or service.
So how does the actual cash flowing of the invoice work. Let's take an example of a $ 50,000.00 invoice as an example! As soon as you have issued that invoice you receive cash for the invoice, less a discount, which is typically in the 2% range in Canada, sometimes more... sometime less.
Our style is not to complicate things, but in actuality usually an additional 10% is held back as a reserve, or holdback. That money comes directly back to you when you client pays. So at the end of the day all you have in effect ' paid for ' is the invoice discount, the previously mentioned 2% range.
That seems very simply, but typical client questions are:
Why does the discount or financing cost change or vary?
Does the quality of my A/R portfolio affect pricing?
What if my client pays doesnt exactly pay on time?
Good questions ... here are the answers:
Financing costs vary based on the type of firm you are dealing with and the size of your monthly receivables, In general your firm can attract better pricing with a higher quality customer base, but this is certainly never always the case. And finally, we haven't really met anyone that ' pays on time ' these days when cash is valuable. So the factoring industry addresses this by charging a daily 'per diem 'rate based on what one additional day of the overall financing cost we have referred to.
So why is this form of financing effective? Simply speaking it's your new cash flow and working capital solution, allow you to finance receivables and inventory and grow your business. It's no secret that cash flow runs every small business and every FINANCIAL POST 100 firm in Canada. Factoring, aka ' RECEIVABLE FINANCING "helps you smooth out the ups and downs of the business cycle ... effectively.
