Factoring – Financing in Canada has a limited number of options, and factoring is certainly become one of them. When we meet with Canadian business owners and financial managers to discuss their working capital and cash flow problems customers are either self financing or requiring cash flow assistance, or their current financing needs to not provide them with the working capital and cash flow they require.
Canadian banks are among the strongest and most successful in the world – part of that reason is their somewhat conservative stance to Canadian business financing .- That conservative stances serves shareholders very well, but certainly doesn’t help small and medium sized business owners achieve their financing needs .
So where does your business get the cash flow it needs. Long term borrowing, i.e. what the finance people call ‘ term debt ‘ is not really the solution for day to day operating and working capital needs. Companies generate cash from the ‘ current assets ‘ portion of their balance sheet. That involves the following asset categories –
Factoring focuses on turning receivables into immediate cash. Yes there is a cost and a process but those costs and that way of doing business can be properly justified with the help of a trusted and credible advisor in this area of Canadian working capital finance.
When we meet with business owners to discuss their working capital needs it is essential they understand their working capital situation and requirements. Customer doesn’t need to be full fledged chartered accountants to measure their working capital situation and needs.
By taking a very few numbers for their financial statement customers can monitor the level of working capital to fund the business, and make payments on any debt the company has – i.e. loans, leases, etc .
Those calculations are very simply but not always properly understood or monitored by our customers. For example, determine your current working capital by taking your current assets and subtracting current liabilities – it’s as simple as that. Then monitor this number against the following items:
By at lease on a monthly basis analyzing these very basic numbers will show your trends in your working capital needs and any deterioration that might be setting in.
Well, to this point we have discussed the problem – Is factoring the solution? It can be.
Factoring works as follows if you have properly structured a facility for your own particular business model and way of doing business. You simply sell, or ‘factor’ invoices as you generate them. You receive 80-90% of the money immediately, the balance on payment from your customer. There is of course no ‘ free lunch’ in Canada so a financing fee, or ‘ discount fee ‘ is deducted from the funds due you. In Canada this can be in the range of 1 – 2 1/2% on average. Your ability to negotiate the best fee and the type of facility that suits your daily paperwork is probably going to come from working with a trusted and credible advisor in this area of Canadian Finance.
Higher turnover of receivables, I.E. via factoring, is a great indicator of a successful company. Your company is in a better position to invest funds, pay creditors in a timely fashion, and grow and profit your business.
If your firm could sell more because it had the working capital to finance receivables and inventory and purchase more goods you are turning over assets constantly and generating more profit .Therefore the 1-2% cost of the factoring is hardly what the Canadian business owner should focus on. You can also extend credit terms to major customers or new potential customers, which becomes a major competitive advantage – like your firm your customer also views ‘ cash as king’ and will probably reward you with new business. Offering larger amounts of credit to good customers, with great payment terms is a great way to increase your competitive presence.
Factoring might no be the solution for every firm in Canada, most certainly it is not – ‘BUT ‘ – if you cant get the financing you need its a solid working capital Canadian alternative . Work with a trusted advisor to get the facility that suits your business and needs.