Invoice Cash: Problem and Solution for Business Borrowers
Introduction - Invoice cash – What is the problem and solution?
The problem or challenge is classic for Canadian business owners and financial managers. Sales are growing fast, but guess what?
The receivables associated with those fast-growing sales aren't converting into cash. They tie up your working capital for 30, 60, and sometimes 90 days. How can you tell if this is happening? Well, we are sure it’s fairly intuitive to most customers, but you can do an elementary calculation to verify. We also tell our clients there is one easy way to fix the problem.
Accounts Receivable Factoring Companies are a lifeline to businesses grappling with cash flow challenges. Account receivable financing companies convert outstanding invoices into immediate cash, providing a critical financial buffer that enables firms to maintain day-to-day operations, capitalize on growth opportunities, and navigate the ups and downs of business needs.
Understanding the Issue / Tracking Turnover of Working Capital
We advise our clients to track something as simple as the ‘Turnover of Working Capital'—take your sales for a time period, for example, a month or year, and divide by your working capital, which is calculated by current assets minus current liabilities. If your ratio is trending higher, you will find that you are having more working capital challenges.
Providing Solutions / Invoice Cash: A Solution - How Does Accounts Receivable Financing Work
Our clients often ask for solutions, not a financial ratio, as we have presented above! Invoice cash, factoring, or receivable discounting is one solution to the above working capital challenge. This solution also assumes you have been unable to get any or enough bank financing to fund your business.
How Does Factoring Work?
It’s a simple process of generating your invoice as you sell your product, and then on a daily, weekly, or monthly basis (it’s your choice), sending these invoices to the factoring or invoice discounting firm. On a same-day basis, they will send you approximately 90% of those funds immediately. You have just generated IMMEDIATE cash flow for your business. The other 10% of the invoice is paid to yourself when your customer pays, minus a ‘discounting fee', which is a carrying or financing charge for the factoring firm.
Key Considerations for Canadian Business Owners / Choosing the Right Invoice Financing Facility
Canadian business owners need to ensure they have the correct facility. We encourage clients to choose the type of facility where they can continue to bill and collect their receivables during the factoring process. Also, the Canadian business landscape relative to invoice cash/factoring firms is much different than in the United States.
Key Points to Consider
As a Canadian business owner or financial manager contemplating a factoring facility, you should consider the following key points:
1. Understanding Fees
What fees are you paying? Ensure your payment is clearly understood and has no miscellaneous costs.
2. Billing and Collection Control
Ensure you can bill and collect your own receivables. Many factor firms will want to take over your invoicing and collection function to some degree.
3. Understanding the Landscape
Ensure you are dealing with a firm that understands the Canadian landscape – many firms are simply branches of U.S. organizations.
Conclusion
You should ensure that your capital requirements can be met and that the firm can fund companies in your facility size range. More cash flow means more growth, profits, and competitive success for your Canadian company. That is a good thing!
Call 7 Park Avenue Financial, a trusted, credible, experienced Canadian business financing advisor who can assist you with your funding needs.
FAQ: FREQUENTLY ASKED QUESTIONS / PEOPLE ALSO ASK / MORE INFORMATION
What are the Benefits of Using Factoring:
Potentially lower monthly payments: Compared to traditional loans, factoring may allow you to spread the repayment terms on your invoices, resulting in lower monthly payments.
Conserve cash flow: By selling your invoices to a factor, you can receive immediate cash, freeing up cash flow for other financial needs or emergencies.
Improved cash flow predictability: Factoring can provide a more predictable cash flow, making it easier to manage your business finances.
What are Potential Drawbacks to consider when Using Factoring:
Factoring fees: Factoring companies charge fees for their services. These accounts receivable financing rates can vary depending on the size and number of invoices factored.
Reduced profit margins: The fees associated with factoring can reduce profit margins. It's important to factor in these costs when pricing your goods or services.
Loss of control over receivables: When you factor your invoices, you essentially sell them to the factor. This means you no longer have control over the collection process.
What is the difference between factoring and a traditional loan?
Unlike a loan, where you borrow and repay it with interest, factoring involves selling your accounts receivable to a factor at a discount. The factor then collects the payments from your customers. Larger firms can qualify for asset based lending solutions that combine a/r and inventory financing as key balance sheet items into one single line of credit.
What types of businesses typically use factoring?
Invoice Factoring is a standard option for businesses that sell on credit terms, particularly those with slow-paying customers who don't provide consistent cash flow to the company. It can also benefit startups or businesses experiencing rapid growth and needing to address their business debt schedule obligations.
What are the eligibility requirements for factoring with accounts receivable financing companies?
The eligibility requirements may vary depending on the factor company and the type of industry you operate in. There might be minimum invoice amounts, creditworthiness requirements, and industry-specific criteria. Business bank statements and basic business financial statement information should be available for the lender.
What are the typical fees associated with factoring in financing receivables and receivable loans?
Several fees are associated with factoring and invoice financing, including a factoring fee, an account management fee, and a reserve fee. Ensure you understand all the costs of an accounts receivable loan financing solution and any hidden fees before entering into a factoring agreement versus a traditional loan/ small business loan.
Is factoring accounts receivable financing right for my small business /SME?
Factoring/accounts receivable financing can be a helpful tool for businesses that need to improve their cash flow. However, weighing the benefits and drawbacks of a factoring company accounts receivables finance solution is crucial to determining the right financing option for your situation. Many industries utilize a/r financing extensively, such as trucking companies and staffing agencies.
