Invoice cash is probably best known as factoring or accounts receivable financing here in Canada. Although the business of factoring is hundreds of years old and works widely all over the world it has been a bit slower to catch on here in Canada. Lets examine some of the reasons why that has been the case, and we will also focus on why it is a timely solution for many small and medium sized companies here in Canada. And by the way, many of Canada’s larger and largest corporations use this form of financing also!
Factoring is the selling, or in some cases ‘assigning ‘your accounts receivable for immediate cash. Immediate is the key word, since you get your funds the same day often, as opposed to waiting 30, 60, or sometimes 90 days for accounts receivable.
How can you possible make money with factoring when it is in effect a financing cost?!! Well, consider this – if you recognize that you have a cost to carry your accounts receivable, let’s look at what it costs you, and then determine what things might look like if you were collecting your money the same day that you invoiced your customer for goods or services.
Back to our example – and let’s point out that we are talking only about the cost to carry the receivable, not the risk of bad debt, etc. Our example is from one of the leading credit organizations in them U.S. (NACM), but it is of course 100% applicable to Canada.
What does it cost to carry past-due accounts? If a 5 percent net profit is realized on sales, for every $100 accepted in credit, $95 is paid for product, expenses, taxes, and so on. Interest alone can erase the $5 profit in a short period of time:
Interest Costs at 12% Per Year:
First month: 12% x $100 = $12.00 divided by 12 months = $1.00)
Consider an example using a yearly sales figure of $12,000,000 or $33,000 per day. If the accounts receivable investment improved and the number of DSO decreased, the following amounts could be released or added to cash flow: by three days – $100,000; by six days – $200,000; by thirty days – $1,000,000. The funds could be used for keeping up with competition (for example, expansion or new product development) or internal improvements (such as salary and overhead increases). Source – NACM
So it is now hopefully abundantly clear that if you can get cash for your receivables on day on, re invest those funds in additional products and services for your customers, and repeat that process all over again you will of course be in effect taking the lead from our title – You are making money with factoring!!
So now your firm is making money with financing – that’s a solid concept! How do you get started on this whole process?
When we meet with customers we advise them that in our opinion the Canadian factoring market is very fragmented, and it is very important to work with a trusted and credible and experienced working capital expert to ensure you have the right facility set up.
A book could of course be written on the ‘right facility ‘for your firm. For the purposes of our information shared here lets simply say that we recommend a very Non – U.S. way of setting up your facility, and that’s the favorite one we utilize for our customers. It is called non – notification. The bottom line is that you are in charge of billing, collecting, and factoring your receivables. Unlike many other factor facilities which are very intrusive your business (the factor company bills and collects your receivables) our method of non notification allows you to seamlessly continue your business on a day to day basis, determine which funds you wish to factor or finance, and most importantly in that whole process the word invoice takes on a whole new meaning: Invoices = Cash!
Speak to an expert and get your non notification facility in place, watch your sales and profits grow!