Worried About The Cost Of Business Accounts Receivable Factoring? Problem Solved!

Updated: March 02, 2011

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.

Featured Research
  • 2017 Contact Center Software Cost Guide

    Are you paying too much for your contact center software? Are you satisfied with its capabilities, or do you wish it did more? These are questions most businesses don’t take the time to think about, even though contact center software is one of the most important investments that you’ll make. With a little bit of planning, you can end up saving money and still end up with better functionality. more

  • What You Need to Know About VoIP Security

    No matter the industry or area of expertise, a strong VoIP system is the perfect tool for any business looking to take both its internal and external communication to the next level. more

  • Are You Using These 5 VoIP Features?

    In large part, the success of your business depends on the strength and reliability of your team’s many communication networks—this includes your Voice over Internet Protocol system (VoIP). more

  • Video Conferencing Best Practices

    Video conferencing is quickly becoming one of the most important communication channels for both small and big businesses. As more businesses turn to this technology, expectations about the experience are also rising. It’s not enough to just offer video conferencing as a communication method. You also need to meet minimum audio and visual standards, and there’s even proper etiquette to consider. more

  • 10 Contact Center Myths Busted

    For most forward-thinking companies, the use of contact center software is on the rise. That said, in spite of contact center software’s sudden rise in popularity, a number of myths have begun to take shape. more