We probably all remember the car rental company commercial… they were ‘ # 2 and trying harder ‘ … that certainly could describe business accounts receivable financing in Canada – your company’s 2nd alternative to cash flow financing after the bank.
So why is # 2 and trying harder gaining so much momentum from Canadian business owners and financial managers? Its pretty simple, it becomes the de facto alternative for businesses that can’t achieve the financing they need from what the industry terms ‘ traditional sources ‘.
So let’s examine some key basics around how the financing works, and also let’s differentiate it from bank working capital financing… the proverbial business line of credit.
What drives an approval and the ongoing operation of a bank line of credit that is collateralized by your receivables? Of course it’s the size of your A/R base, but at the same time other key factors must come into play. The onus is on your firm to show profitability, debt and equity ratios that work for the bank, as well as more often than not emphasis on personal guarantees and even outside collateral.
However, business accounts receivable financing (aka ‘ invoice discounting ‘ ‘ factoring’) focuses solely on one thing – your receivables. The size of your A/R as well as its general quality essentially determines the size of your new accounts receivable financing facility.
The second key difference in comparing the two is that the bank in effect collateralizes your receivables by registering a security agreement against them. They are in effect ‘ assigned ‘ to the bank in the event of a default by your firm.
Business receivable financing however works differently, and that’s quite often mis understood by many Canadian business owners and financial mangers. Under this process you derive cash flow, on a daily basis if you choose, by selling your receivables to the finance firm, in whole, or in part, on an ongoing basis.
That A/R is sold at a discounted price, which in effect becomes your financing fee. (Many customers view this as the interest rate – the industry views it as a discounted purchase from you at a pre determine rate, usually 2-3% per month. So we can also make the statement that the a/r financing process, non bank in nature is a three way agreement, its between yourself, your customer, and your a/r finance partner firm .
Because Canadian banks are highly regulated and generally risk averse they cannot provide the amount of financing that thousands of small to medium sized firms need for working capital. But since the business A/R financing firm is focusing solely on the assets, i.e. your A/R, they can generally advance up to 90% of all your A/R at any given time. So, bottom line, your company doesn’t have to have the capital structure that is required for traditional Canadian chartered bank financing.
In many cases clients are please to hear that their inventory can also be combined into a one stop revolving credit facility by your non bank partner firm. This provides a revolving line of credit with much more liquidity than your firm may have experienced in the past – bottom line – more access to cash flow and day to day working capital for operations and growth.
Clients are generally mystified by the number of firms out there that offer this financing, what they charge, how they work on a daily basis, etc. We recommend they consider a confidential invoice financing facility, one that allows them to bill and collect their own receivables without any third party knowledge, including your customers! Speak to a trusted, credible and experienced Canadian business financing advisor on how business A/R financing can enhance your company’s cash flow today.