Thousands of small and medium sizes businesses in Canada (and by the way, a number of larger corporations also!) have moved towards an independent non - bank method of financing accounts receivable in the Canadian business landscape .
But is there a way in which you can achieve the breakthrough that we're referring to? First of all let's make sure we are all singing from the same hymn book so to speak... covering off the essence of this type of financing.
Simply speaking accounts receivable financing, aka ' factoring ‘... ‘invoice discounting ' is the sale of your receivables , as you generate them , for instant cash flow and working capital . In the majority of cases of this type of financing you still assume the risk of the non collection of receivables, but you're simply monetizing or cash flowing that portfolio of A/R for quick access to cash.
Also of note is the fact that typically while you don't have to finance a receivable immediately as its generated, at the same time invoices over 90 days generally cant be financed as they are assumed as uncollectible . We are always encouraging clients to monitor their A/R agings and schedules to ensure they have a maximum handle on accounts receivable status.
Clients ask why businesses choose this type of financing over traditional A/R finance such as bank lines of credit, etc. That answer could not be simpler, it's a case of getting capital and cash flow that you might otherwise not achieve through a bank, plus it's quick, with the major benefit being that your facility grows as your sales grow. You do not have a pre -set limit per se. That's a huge benefit.
But let's focus on some potential drawbacks to this type of finance - we've always thought it's important to present a balanced view. One of those drawbacks is the perceived cost of the financing. Back to that word perceived in a moment. The whole issue of cost and pricing of A/R financing is one of two issues we are always spending time with clients on. The industry as a whole views the transaction as a discounted sale price, while customers perceive that pricing as an annual per centage rate.
On a day to day basis, as you finance your receivables, they are in effect ' purchased'... at a ' discount ' to their face value. The discount rate on a 30 day receivable in Canada varies widely... that's why its important to work with an expert to achieve maximum best financing. That rate tends to be in the 1-3% range more often than not.
However... back to our word ' perception '. Most clients don't understand there are numerous methods to offset that financing cost, in some cases in its entirety. Its a case of using new found cash flow to take supplier discounts, purchase more effectively, and take on new business that otherwise might not have been possible .
So, is the suspense killing you? Let's not forget the ' breakthrough' we talked about - which is what we have come to call ' C I D '. Its confidential invoice discounting, and it goes against the grain of all the U.S. and U.K. companies in Canada that offer this type of financing. It puts you in control, and that's a good thing, right? You bill and collect your own receivables, with no notification to your clients, suppliers, etc.
Most clients balk at the use of financing accounts receivable via factoring solely because of the issue of notification to your clients, and we're just removed that issue. So that, coupled with the best invoice factoring pricing you can achieve makes this financing very attractive to firms that can't achieve bank or traditional financing of their working capital.
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