When Canadian business owners and managers utilize an accounts receivable financing company the focus is all on the dollar value and quality of your A/R. That’s what is going to generate cash flow under this process – which simply is a transaction in which you immediately monetize your sales for cash, at a discount… the obvious benefit being the ability to generate cash flow and working capital for your company.
We will add a small technical point here, in that when we typically describe the process we always advise clients that invoice discounting monetizes your revenues as you generate them. That infers that you have to finance those sales all the time and immediately, and actually that’s not 100% correct. The reason? Simply that if you are working with the right firm you certainly can finance any amount of sales you need – it doesnt have to be all or nothing.
And about that ‘ timing ‘ issue. The reality is that you can finance those sales ‘ ANYTIME’ after you make them. Quick example: You generate a 100k sale to one of your clients, and the client typically pays you in 60 days. (Notwithstanding your terms are 30 days!) . If you don’t need the cash right away but need it, for example around day 45 in this process, you can finance the invoice then. The benefit – Again its immediate cash when you need it and you are only paying for 15 days of financing! Talk about a win / win!
Invoice discounting, A/R Financing, Factoring, etc are all synonymous terms for the process we are describing today. Pricing always causes mass confusion with clients. Can this confusion be avoided? We thing it can when you simply focus on and understand the three elements of A/R finance pricing – they are:
The advance rate/ holdback
The discount rate
Time to collect your accounts
When you have a solid grasp on those you’ve become somewhat of an immediate Receivables Financing expert.
Let’s use a quick example, and let us use a 100k invoice as an example. There is no real dollar limit on these facilities, and for that matter invoice size, whether large or small, is not a concern either.
Anyway, you have just invoiced your sale and have 100k outstanding on an invoice. The Accounts receivable financing company will typically advance, at your request 90% of this amount. The 10% is a reserve or holdback that allows for anything going wrong, primarily uncollectibility. If your customer pays you in 60 days, as they typically did in our example you receive the 10% holdback, less financing costs which are typically 1.5-2% for a 30 day period.
If you are using traditional A/R financing companies the finance firm you are dealing with handles collections. That’s not our recommended solution – as we prefer the confidential invoice financing strategy, allowing you to bill and collect your own accounts, with no notice to any client, supplier, other lender, etc. We do of course point out that when financing receivables your accounts receivable financing company partner must in fact have clear collateral of your receivables. Many clients we talk to think they can have a bank line and finance receivables via a commercial finance firm. They are wrong! It’s one or the other.
Seek out and speak to a trusted, credible and experienced Canadian business financing advisor who can assist you in setting up the facility that works for your business when it comes to monetizing your sales revenues and cash flowing that balance sheet!
Originating business financing for Canadian companies , specializing in working capital, cash flow, asset based financing . In business 10 years – has completed in excess of 80 Million $$ of financing for Canadian corporations . Core competancies include receivables financing, asset based lending, working capital, equipment finance, franchise finance and tax credit financing.
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