Business owners and financial managers today are totally focused on ‘cash flow ‘. Never has the term ‘cash is king’ (cash flow is king?!) been more relevant.
The 2008-2009 world economic crisis drastically affected business liquidity. Every financial institution in Canada, i.e. Banks, trust companies, life insurance companies , third party independent finance companies, etc all had liquidity issues and concerns .
Larger corporations scrambled to re adjust their capital, long term loans, issue new equity, etc. This of course left the small and medium sized business in Canada scrambling – typically this part of the market is, in our opinion, the great ‘void ‘in business financing, the area providing the most challenges to business financing.
So why factoring as a cash flow financing vehicle. It’s more expensive, quite a bit more expensive, but it works. Often times it’s an interim solution, even a short term solution to a company’s liquidity problems.
The challenge in Factoring in Canada for the Canadian business owner is a multiple challenge – this new alternative financing method is fairly misunderstood, there are numerous players in the market, (many firms aren’t Canadian) and, probably most importantly methodologies to deliver the service vary very significantly. And we mean really significantly.
The main advantage to Factorings current popularity is its ability to turn a receivable into cash immediately. Receivables are sold, or assigned to the factor firm, and cash is deposited immediately into the company bank account.
We spoke of methodologies varying differently from firm to firm. In certain cases the company will be required to finance all of its receivables, in some cases the facility is set up , potentially, as a ‘ bulge’ with a current lender, most often a Canadian bank . This is probably the best strategy of all, but frankly it is the most challenging to set up as the Canadian chartered banks are reluctant, because of size and security, to be a partner to this type of arrangement. We spoke of factoring being more expensive. The factor lending firm views the cost of the service and financing as a discount rate, or fee. (We also thing that’s the best way to look at it). Canadian firms don’t look at it that way; they view it as an interest rate that comes with a much higher cost of borrowing. Therefore a facility that has a combination of bank and factor lending has an overall lower cost of borrowing and maximum borrowing power.
Factor firms have very levels of involvement in your business when you have such a facility. The factor financing can have a strong level of daily ‘ intrusion’ into the Canadian firms business – the factor might insist on delivering invoices to your customer, notifying them of the financing arrangement, and yes, you guessed it, even calling the customer and collecting the receivable . Naturally in a perfect worked most firms would rather perform these functions themselves as part of the overall ‘customer relationship ‘.
Yes, factoring is cash flow financing at its finest and quickest, but Canadian firms are encouraged to ensure they are working with a firm who truly understands their needs and can maximize the total cash flow process with minimum intrusion and maximum financing cost savings.