Will My Canadian Company Benefit from an Accounts Receivable Factoring Facility?

Canadian business owners and financial managers are hearing more and more about the concept of 'factoring 'their accounts receivable as a cash flow solution and overall strategy. Increasing numbers of companies are investigating what most people consider to be an 'alternative financing' strategy.

'Alternative 'clearly is in the context of alternative to a Canadian chartered bank line of credit. As Canadian companies build up their investments in accounts receivable ( and inventory ) they are finding it more difficult than every to ensure that their customers are paying them on time, typically not receiving those payments in 30 days per the terms they provide to their customers . Naturally the current somewhat difficult economic environment as we head into the 2010 Business year lends itself to slow paying receivables. Management therefore is paying more and more attention to managing cash flow, and, most notably, this is taking more and more of senior management and business owner time.

The basic challenge is as simple as it gets - suppliers, landlord, and, dare we say it, your employees want to get paid on time , while the source of that cash is tied up in receivables that are paid in , many times 60-90 days.

Enter Factoring as a potential solution that will allow the Canadian company to benefit from increased cash flow, albeit at a cost. Just to be clear, the term factoring is also referred to as 'invoice discounting' and 'accounts receivable financing '.

The mechanics at the outset seem overly simple . You send your invoice (or invoices) to the 'factor' firm who immediately, usually same day, sometimes next day, issues you funds for that invoice or group of invoices. All of a sudden you immediately have the working capital and cash flow to run your business.

Let's be clear, this is not a loan per se. It is an immediate advance of funds against money owing to your firm for products and services you have delivered. We used alternate term 'invoice discounting' as noted above. The 'discount 'referred to be the amount of the finance charge the lender keeps for carrying the receivable.

We cant over emphasize the fact that the funds generated from an accounts receivable financing facility such as we have describe should be used for short term working capital needs . You need to view the factoring facility in exactly the same manner as your bank line of credit (if you had one!)

So more about the potential 'benefit 'of factoring that we have alluded to. We can somewhat easily say that a factoring facility can be set up in fairly short time, certainly in much less time than it would take for your firm to negotiate a bank cash term loan or a Canadian chartered bank line of credit. Another benefit? It's simply that you receive that much needed cash same day. A very significant amount of the invoices, usually 80-90% is 'advanced 'to your firm the same day. The difference is held back as a temporary holdback, and remitted to your firm, less the finance fee, when you customer pays.

We have focused on some of the benefits of factoring, such as the strong cash flow aspect of this type of facility, and its ease of set up once you have found a solid partner firm. However, the cost of the facility is usually between 1 -3% of the invoice amount for a 30 day period - Naturally you entered into such a facility because your customers probably weren't paying you in 30 days already, so you can see that the financing fees can add up .

So, as in all business evaluations there are trade offs - if you firm can absorb the financing costs with adequate profit margins on your products and services you can categorically benefit from a factoring, a ka working capital facility .!