Factoring – Financing in Canada for Canadian small and medium sized business is somewhat limited due to the financial alternatives available to Canadian business owners and financial managers. Also, the overall structure of our banking system, although conservative and strong, by its own nature limits working capital and debt options.
If your company is trying to grow significantly, or in some cases just survive your company has access to working capital.
When we meet with Canadian firms to discuss their working capital arrangements and needs the meeting generally starts out with discussion of the working capital need. Receivable financing is where the majority of that financing comes from. We can of course discuss the matter ‘technically ‘also. Finance analysts and bankers looking at your financial statement can quickly calculate what is known as the ‘ Quick Ratio ‘ – That is simply taking our cash on hand and receivables, adding them up, and dividing by your current liabilities . As accounting like and technical as this may seem we strongly recommend to business owners that they monitor this figure quarterly , monthly, and annually – it’s a great investment in understanding your working capital needs .
When business owners are faced with cash flow and working capital challenges owners must address what solution is available to increase cash flow. If your company does not have traditional Canadian chartered bank financing the concept of ‘factoring ‘has the ability to remedy your working capital challenges.
Factoring in Canada provides you immediate cash for your receivables that you otherwise would be waiting 30, 60, and yes unfortunately sometimes 90 days for your funds from customers. If we go back to our ‘ Quick ratio ” example we can see that your cash and receivables on hand might clearly not be able to cover your current liabilities, most notably accounts payable, Government source deductions, etc .
We cant over emphasize that factoring as a solution is not ‘ borrowing ‘ or term debt as the bankers like to call it . It is simply a method of liquidating your current assets earlier than you anticipated; giving you the cash flow to pay supplies, employees, etc.
The basics of ‘factoring’ in Canada very widely. That is partly because, in our opinion, that factoring in Canada is viewed much differently than where it originated in the U.S., and England. We therefore encourage customers to understand what the Canadian factoring environment is all about so they do not lock themselves into a financing strategy that is contractual in nature, has too high a cost, and is not productive from a daily paperwork point of view.
Many businesses in Canada have major misconceptions about factoring as alternative financing. When we meet with customers we continually find we are clearing up those misconceptions by discussing the following points:
The Canadian Factoring landscape is very different than in the U.S.
Canadian businesses in Canada generally have the perception that factoring is both intrusive to their customers , and that the overall credit quality of their customer limits the amount of funding that your firm can receive under a factoring or working capital facility .When we talk to customers we can show them ways in which they can offset most , sometimes all! Of the costs of factoring. The actual factoring cost is viewed by many customers as an ‘interest rate ‘. This is a poor way of looking at the cost – a better way is to view your ability to get unlimited cash flow financing at the expense of 1-2% reduction in your gross margins.
Many Canadian firms also don’t understand the day to day basics of factoring – we can for explanation purposes here simply say that it is the selling or ‘discounting ‘of your receivables in two steps. You receive 80-90% of the cash for the invoice the day you generate the invoice and it is a true earned, or ‘owing ‘invoice. You receive the balance when the customer pays you, less the 1-2% discount fee that we talked about earlier.
Is factoring for Canadian business the panacea and ultimate solution for every Canadian firm – Definitely not. Can it help thousands of small and medium enterprises in Canada fix their working capital problems – absolutely yes! Work with a trusted and experienced advisor in this area to ensure you have the best facility, at the best rate that suits your business model and way of doing business.