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Factoring and Financing Receivables In Canada

Financial managers and business owners all over Canada keep hearing about factoring receivables in order to obtain a solution for working capital, enabling them to generate cash flow for firms. How does this work in Canada, and how can you benefit from factoring?

In Canada, factoring enables Canadian financial managers and business owners to have an alternative means of meeting cash flow and working capital needs. Classic situations in which a firm would require this sort of financing would be during a period of significant growth or an inability to finance the daily needs due to much larger contracts or orders with new and existing customers than usual.

Understanding the factoring business model is simple, but it does require some additional assiduity to decide which technical method works the best for your particular firm. These days, Canadian firms are challenged in delivering the best financial performance in order to survive. Naturally, the global financial problems from 2008 that firms are only now breaking away from did not help in any way.

While most business owners take to banks in order to get financing, it is often true that a firm will not qualify for the loan or have either previously qualified and are currently unable to get the loans that they require to make the capital accounts, which are primarily inventory and receivables.

Naturally, business owners in Canada want another way out, and factoring is the way to do just that. If nothing else, choosing to put all of your eggs in one basket by going for one single source of financing, such as through a bank or another lender, has proven to be too dangerous for new, small firms.

It is recommended to try receivable factoring, though this is just one of many ways that is available to firms. Under this method, firms remain in complete control of invoicing the clients and assign the proceeds of the receivables to a factor. Firms can bill and collect these receivables in the same manner that they have always done with work, but because of how factoring can help businesses prosper, you will instantly receive some working capital and cash flow once you create a valid invoice for your customer.

Simply put, factoring is monetization or the immediate flow of cash into accounts receivable. This process lets you overcome the biggest problem that most businesses have in terms of working capital, which is providing terms of payment to customers and watching them take even longer than that to actually pay their owed money.

Factoring and financing receivables puts firms back in control of a challenge that has been timeless for ages. Most firms use this kind of financing as a bridge to return to standard financing since the bank sees cash flow coming in at a regular pace for a lengthy period of time.

While the higher cost of this kind of financing may seem like a turn-off, it is usually offset by buying with more intelligence or by using some of the discounts that were not previously available back when the firm had large inventory positions based on prior customer habits of paying over the course of 30, 60 and 90 days. Firms with customers paying over 60 or 90 days can generate all cash up to three times through factoring rather than being paid once during that period of time.

Factoring is simply about turnover. Is it the cure-all for any firm? It is impossible to say as no single type of financing will work for every firm in the long term, but it still serves as an excellent bridge to get to the next growth. Because your firm has financial difficulties or is growing too far, that bridge is there to take you to the next point of standard bank financing.

Additionally, by offering extended terms of payment that you are comfortable with to either new or existing customers, you can keep ahead of the competition with the advantage that you provide to all of your customers.

How can you cross the bridge? Know the following facts:

  • Factoring offers instant cash flow and an immediate solution for working capital in Canada
  • Factoring is indeed a bit more expensive than going with the traditional means of financing
  • Frequently it should be looked at more as an interim facility for financing
  • Different firms will offer different kinds of factoring in Canada, so it is best to not pick the wrong company.

Receivable financing and factoring, which is often also known as invoice discounting, differs from the lines of credit that Canadian firms may get from traditional banks. Depending on which facility you use, you can have unlimited access to your working capital because factoring places a special focus directly on the assets rather than the income statement and the balance sheet that do not tell the entire story. When in a standard bank negotiating for a line of credit, all of the focus is placed on you as an owner, your income statement, your balance sheet, your experience in the business and the industry you are in.

Though it can seem somewhat expensive out of the gate, true analyses will prove that factoring will help you make money in the long run. The costs that you can see associated with this sort of financing will easily be offset by being able to bill and collect on your receivables, and you will therefore be able to buy smarter with discounts from your suppliers while also improving your overall relationship with the suppliers.

Is it actually as simple and easy as that? Yes and no; it is challenging to set up a proper facility for factoring in Canada but only because it can be difficult to figure out what kinds of facilities are available for you, as well as how they work, how much they will cost, whether you will want to leave a contract open ended or locked in and the overall level of comfort that you feel with the day to day business model of generating sales and factoring your accounts receivables.

At the end of the day, factoring is a great new means of financing your capital, and it works because you will immediately receive the cash for your accounts, which lets you start up your business cycle all over again without a problem. To get started, you will want to speak with a trusted, credible business advisor who is also experienced in the industry and in this area in general. This will help you learn whether or not you understand the benefits you can receive with this sort of financing and how you can craft it into something that works just for your firm in Canada.