Factoring – Financing Canadian Receivables With Proper Rates and Structures
Factoring – Canadian receivable financing continues to gain momentum as a financing alternative of choice for Canadian business owners and financial managers. It simply is a case of a common sense approach to improving cash flow and working capital without taking on any debt and at the same time allowing your firm to grow without traditional type financing that might be difficult, or in some cases, impossible to achieve.
In the past many businesses viewed factoring as a high cost financing solution – the reality is that due to a combination of increased popularity and industry competitiveness that rates have improved a great deal.
Canadian business owners considering factoring should also be aware that that they can influence and negotiate rates to a certain degree. One method is to consider your willingness to lock into a one year contract, which in many cases will allow you to lock into a fixed rate that might be, in our experience, 4-6% lower than might be achieved through an open ended term.
Clients ask us what risk or cost is involved in locking into a one year contract – the reality is that most firms considering factoring (also known as receivable financing, receivables discounting) actually do stay with this type of facility for at least a year. Firms that factor their accounts receivable usually have two options at the end of a one year fixed term – either move to a competitive factor facility, or in some cases migrate back to or achieve traditional Canadian chartered bank line of credit financing. While bank financing always has the lower rate the reality is that it in many cases does not provide you with the amount of working capital you need if you are in high growth mode. Alternatively you may also have trouble meeting some of the bank ratio and covenant guidelines that come with those very respectable bank facilities.
We point out always to customers that the largest corporations in Canada and the U.S. in some cases also use factoring type facilities – it simply gives your firm, as well as the large firms, maximum leverage on working capital without taking on debt.
Qualifying for invoice factoring or determining what amount of type of facility you engage is in general a relatively simple process. If clients advise us they have $ 200,000.00 a month in receivable we have found by experience that it is good to build in a growth buffer and set up a 250k – 300k facility, this simply allows for growth.
The amount of your factoring facility and the rate it commands is dependent on three issues –
– the general overall risk profile of your firm – re growth, profitability, type of industry etc
– the size of your total receivables
– the overall customer quality or credit worthiness of your customer base
In some cases concentration also plays a part in your rate and facility structure. Concentration is a double edged sword – you might have a great customer, perhaps a major corporation who in fact is say, 60% of all your business. It’s great to have a credit worthy and prompt paying customer, it is not so great to carry the on going risk of at some point in time losing your one large customer.
If you are having financial or growth challenges it is generally not recommended by finance people that you take on more debt – factoring solves this problem nicely – you are simply liquidating your receivables faster without borrowing.
Seek a trusted, experienced and credible advisor in this niche area of Canadian business financing and assess your factoring options relative to type of facility that meets your growth needs. A factor facility with rates, terms and structures that suit your business model and provide you with all the working capital and cash flow you need is a competitive advantage.