Does a Canadian Factoring and Receivable Financing Facility meet your Business Financing Needs?
Stan Prokop
Canadian companies continue to look at Factoring, also known as Receivable Financing (and also known as Receivable Discount / Cash flow financing!) as a very viable working capital alternative. This type of facility works for Canadian firms for the following basic reasons:
-It is an alternative to chartered bank financing which the company cannot always obtain -It provides high advance rates on all receivables -It has the ability, under the right circumstances, to be combined with an inventory and purchase order facility -
The factoring scenario is Canada is very complex – that is because the marketplace can seem very confusing to Canadian business owners. Why the confusion. I guess we can call it a fragmented market. The receivable financing 'battleground' in Canada is made up of the following types of firms –
*Some Canadian chartered banks (they offer a factor facility as an alternative to bank operating lines)
*Subsidiaries Branches of Larger U.S. and International Factor firms
* Canadian owned and managed factor firms
We would note that all of these firms have different geographical preferences, some have market niches, and some do not have the capital to service all the customers they acquire.
Most Canadian businesses have heard the basics of factoring – it all seems quite simple - Your company sells product, issues an invoice, ' factors' the invoice , gets paid immediately by the factor firm, and the whole process starts over .
However we caution business owners that a great deal of care and diligence is required in picking the right partner firm. The key issues the business owner should understand thoroughly are:
What is the size, reputation, and financial credibility of the Factor firm I am considering (This firm will be in direct, yes very direct! Contact with your customers - You will want to ensure they are professional, have a solid back office operation, and understand at least a bit of your business .)
Factoring is right for your business if you as a business owner are experiencing either failure or difficulty in arranging traditional bank operating facilities. From start to finish a full fledged factor and receivable discounting facility should be able to be implemented in a couple of weeks. Negotiating a bank operating facility with covenants, disclosure, additional collateral, etc can take many weeks, often much longer than that.
Factoring will also meet your business financing needs if your firm is in high growth mode. Most business owners are surprise to find out that high explosive growth is not necessarily desired by traditional banks, trust companies, credit unions, etc. That is because of the volatility in cash flows, financial rations, etc.
Although a factoring facility is often perfectly suited to the growing firm or the firm that has challenges obtaining traditional financing it is a more expensive type financing. Although 99.999% of the time the factoring solution will have a significant cost attached to it many customers will benefit and offset those costs by selling more, collecting quicker, and turning inventory over more profitably . All of those are very measurable in financial calculations and Canadian business owners often fail to take them into account when confronted with the 'sticker shock 'of factor pricing. It can be very technically proven via solid financial analysis that this type of financing in fact is a solid cost alternative to traditional financing, which comes at a cheaper cost.
In summary, a factoring facility will meet your business financing needs, providing you with unlimited working capital as your receivables grow. It can also, with the right partners, be combined with other facilities that are very complimentary.
If a Canadian firm understands how Factoring works, who the credible partners are, and the nuances of different types of factoring then we can categorically say that this type of financing will meet the business needs. Alternatively they should seek the advice of a trusted and credible business financing expert.
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