As a basic primer invoice financing is essentially the short term sale of your receivables, or 'AR' that generates immediate cash flow and working capital for your company. Sounds good so far right? In certain cases it even eliminates all your credit and collections costs, although we must be frank and say that type of financing (turning over your credit decisions to another firm) isn't our favorite, or recommended strategy. Clearly being able to obtain the benefits of this type of financing and being in total control of your own invoicing and collecting is the optimal solution.
The benefits of accounts receivable financing all come back to cash flow - business owners quickly realize that sales don't equate to cash, and that can become an ongoing problem. Many entrepreneurs we meet advise they struggle with cash and working capital issues on a daily (if not hourly!) basis, and given that they cannot obtain all, or the proper financing from their banks it seems logical that business accounts receivable financing is truly the only, and perhaps best, solution.
So, back to our main topic, which is understanding the cost of this type of financing! Canadian business needs to realize that if the lack of financing is stopping you from growing your business then the cost of new financing should probably not be your biggest worry.
Let's look at a real world type example. Take a look at your balance sheet. You probably have limited or minimal cash on hand and significant investment in receivables.
Let's use a firm with 1 million dollars in sales as an example. Lets assume you have some decent, or even great gross margins, or 'cost of sales'. Your overhead costs are fixed, and in control, and you are a profitable company. Since you haven't any access to bank or traditional financing your net income is positive, but not growing.
If you can grow, or perhaps even double, your business by solving your cash flow problem then the business accounts receivable factoring cost is only associated with your additional growth that comes from accounts receivable financing.
Again, back to our example - your sales are 1 million, you have no financing, and factoring or invoice discounting will allow you to grow your sales to 2 million dollars. The cost of financing would probably be in the 40,000 to 50,000 dollar range - however, your overheads, or your fixed costs have stayed the same. Your profits, minus the factor cost can probably easily double.
Our example above focuses on the concept of opportunity cost, i.e. what you can do with capital by achieving more turnover and profits.
The actual financing cost of business accounts receivable factoring in Canada vary - they typically are between 1- 3% a month. 2% tends to be the norm. Better pricing can be achieved based on the size of your facility, the relative quality of your receivables, as well as the type of firm you deal with when you enter into a receivables financing arrangement. And don't forget that confidential account receivable finance is also available in many cases - allowing you to totally control your customer base and cash flows.
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