My Factoring Blog – How Factoring Invoices Help Increase Cashflow

Invoice Factoring Companies | Invoice Factoring

Factoring in Canada is four things:

- New and increasingly accepted

- Misunderstood

- Different than in the U.S.

- Growing more popular every day as an alternative vehicle to business financing

Canadian business owners and financial managers keep hearing about factoring , and when we talk to clients who are pursuing this financing option it is increasingly clear there is a lot of mis information and ' noise ' about this unique type of financing that needs to be clarified .

So why is there so much mis information about factoring and how can business owners in Canada get the 'real story '. Part of the problem is that factoring, in our opinion, means different things to different people, both within the industry itself, and also to the Canadian business owners. Similar to the terms ' cash flow ' and 'working capital ' the use of the term is interchanged in a variety of ways . Also, factoring isn't a home grown solution, and migrated to Canada from the U.S. and Europe, where it has been in place for hundreds of years.

Factoring, also know as receivables financing , or ' invoice discounting ' is best utilized when firms are growing rapidly, have sales and verifiable invoices, and require injections of working capital for that a/r investment that otherwise might not be available through traditional sources such as the bank . In 99% of cases that we deal with where a client is a ' start up ' the initial financing through a factoring facility is a critical and valuable tool in the early growth of the company .

Let's get back to the confusion around factoring. Traditional factoring in Canada is in fact simply the sale of your receivables, and their purchase to a factor firm. The most immediate benefit is the immediate receipt of cash, which eliminates the need to wait for anywhere between 30-90 days for payment from your customer. Over the years it is inherently obvious that every firm out there recognizes that delaying payments to your suppliers is an instant form of cash flow. However, when you are on the receiving end of that, waiting for your money, that is poor consolation!

Does your business receive 100% of the invoice value when you sell your invoices either individually, or bundled in a larger amount of invoices? The answer is 'no' – You generally receive on the same day anywhere form 75-90% of the invoice value. The balance is held back as a hold back or buffer, and paid to your firm immediately on final receipt of payment from your customer. At that point factoring would be 'free ', but it isn't, there is a further deduction for the commission or financing cost by your factor firm. That cost is one of the greatest issues facing Canadian business owners, because it is anywhere in range from 9%/annum to 2-3% / month.

The costs associated with factoring in Canada have to be viewed in the context that although they are higher than traditional bank financing that point becomes moot because your firm probably cannot qualify at this point for a true Canadian chartered bank operating facility. So factoring simply allows you to grow your firm when you can't obtain sufficient financing otherwise.

So now we have understood what factoring is, and why it has become a tool within the Canadian business financing tool kit. That's the easy part. The challenge for Canadian business then becomes -

- What type of firm is the best one for my company and industry

- How does this financing work on a daily basis

- Am I comfortable enough to let the factor firm notify my customers regarding invoice verification and payment

- Is there an alternative to involving my suppliers and customers into this financing process

We advise clients that the best factoring facility in Canada is one in which your firm can bill and collect its own receivables. That type of facility is called non notification and is as close to traditional financing mechanics as one can get.

So whats our bottom line summary – it's simply as follows. Factoring in Canada is only mis understood because business owners don't have access to solid unbiased information on how it works, what it costs, and how it benchmarks as an alternative to traditional financing. Certain factoring facilities in Canada exist that are very transparent to your firm and its customers. Factoring has higher costs, but those costs can grow your sales and profits considerably. Seek out the advice of a trusted, credible and experience advisor in this somewhat misunderstood area of Canadian business financing.

Factoring receivables refers for the process by which smaller companies sell invoices to become able to obtain funds these days. In this case they do not have to wait for a credit period of 30, 60, or 90 days. Thus by selling invoices smaller firms tend not to generate debt. This exercise of invoice factoring is basically employed as a finance management tool.

This practice of invoice factoring is usually adopted to avoid any loans or giving any collateral against availing any loan. The fee for invoice factoring is paid in terms of discount. This discount can ranger anywhere between 2.5% to 7%. Like a result of invoice factoring the smaller companies prevent exhibiting any loans on their balance sheets plus they also do not have to invest any interest for the cash taken. This results in better profit figures but slightly various with buy order funding.

A number of businesses also help tiny businesses in accounts receivable factoring. These businesses set up the firm with the ideal factor for any distinct factoring circumstance. If a person has an invoice or any receivable to become factored then these firms come out to assistance in the same.

These businesses assist the manufacturers, distributors, importers, exporters, wholesalers, contractors, suppliers etc equivocally. They also assistance truckers in construction invoice factoring. These organizations help to locate ideal aspect for any specific predicament within the area or can also aid to select from nationwide factoring organizations to avail the finest rates. They usually customized solution as per the clients require. To avail the services of such firms firstly a form needs to become filled out stating the type of receivables and other details needed for invoice factoring. Then these businesses approach the probable paying parties that avail invoice factoring. Some of these organizations assume the risk inside the deal for non-recourse factoring wherever the client isn't necessary to spend back.

You'll discover various sorts of organizations with distinct forms of rates for factoring. Any invoices or receivables towards amount of $100,000 might be factored instantly. The average rate payable for discount in such cases is 2-5%.

Some businesses specialize for a specific category of invoice factoring. For instance, some businesses indulge only in invoice factoring for medical business. Some firms, which cater to little and medium companies for invoice factoring, build invoices on the net and acquire immediate funding. They usually give a 24 hours turnaround. Other types of companies also give funds to small firms for their day to day operations against collateral of their invoice or buy order. These kinds of organizations also purchase mortgage notes, structured settlement annuity or medical receivables.

From Entrepreneur:

Say you're a young startup–growing fast, but with little-to-zero positive cash flow–and you're straining to reach the next level or just to get through the end of the month. The bank-financing drought is showing no sign of letting up, and of course credit lines are reeled in tight.

What's the answer? For a growing number of startups, it is factoring. The practice involves a financing company, or “factor,” advancing you money based on its buying your receivables at a discount; your customers pay the factor the full value later, when the bill is due. Factoring gets you cash in hand immediately–but at a steep price. Factoring fees are much higher than interest rates charged by a commercial bank. Fees are quoted by the month, so a typical 3 percent fee is actually the equivalent of a 36 percent annual interest rate.

Dealing with a factor can also be much more difficult than with a commercial bank. Banks are highly regulated, offer competitive rates and commoditized lending services, so entrepreneurs can, with few exceptions, easily anticipate the cost and terms of their loan. But factoring is very fragmented. Most factor financing is provided by smaller, unconventional lenders. It is much less regulated and the quality, reliability and integrity of factors vary widely.

The reason more startups are turning to this more expensive, risky alternative is simple: It is often the only way to get cash. And if it is the route you decide to pursue, due diligence is the single most important step. Investigate how long the factor has been in business, where its offices and headquarters are and the background of its management team. Ask for referrals from current clients, and research complaints or lawsuits using web searches, the Better Business Bureau and the state's Attorney General's Office. Also, trust your gut: If you feel you can't build trust with the factor, don't pursue the loan.

If you go forward, review your contract with a magnifying glass, particularly these points:

• What is the duration of the contract? The shorter the better–ideally, month to month. You want to switch to less expensive financing as soon as possible.
• Will the factor negotiate? Some factors allow contract negotiations while others offer only take-it-or-leave-it documents.
• Must you provide a personal guarantee? This allows the factor to go after you and your assets to be repaid. Some factors will lend without a personal guarantee or on a “non-recourse” basis.
• Will the factor take possession of your receivables if they are uncollected? Probably not, which means you'll need to collect on your own. Be prepared: If receivables are uncollected, you'll need to repay the factor's advance or you may lose financing altogether.
• How will the factor notify your customers? Ideally, the factor will create a lockbox to accept payments in care of your company. You maintain day-to-day contact with your clients so that everything appears seamless and they are not aware of your financial situation.
• Will you be required to factor 100 percent of your receivables? Cash flow and collections patterns fluctuate, and some weeks you may not need financing. If your factor requires you to finance all receivables, you will pay dearly for financing even when you don't need it. Single-invoice or spot factoring allows you to opt out.
• Is there a minimum or maximum sales requirement? Some factors require a certain sales volume. If you are not within the limits, you may lose your financing–so the fewer restrictions, the better.

Finally, always keep the end in sight. The real goal with factoring is to improve your cash flow, increase liquidity and rebuild net worth to qualify for commercial bank financing. Commercial bankers can help you figure out the financial targets that can help you re-qualify, but it is up to you to create the plan.

As a commercial lender, I have seen businesses resort to factor financing for one or two years at the most. If the company still didn't qualify for bank financing at that point, chances are, it was already out of business.

From Entrepreneur:

Say you're a young startup–growing fast, but with little-to-zero positive cash flow–and you're straining to reach the next level or just to get through the end of the month. The bank-financing drought is showing no sign of letting up, and of course credit lines are reeled in tight.

What's the answer? For a growing number of startups, it is factoring. The practice involves a financing company, or “factor,” advancing you money based on its buying your receivables at a discount; your customers pay the factor the full value later, when the bill is due. Factoring gets you cash in hand immediately–but at a steep price. Factoring fees are much higher than interest rates charged by a commercial bank. Fees are quoted by the month, so a typical 3 percent fee is actually the equivalent of a 36 percent annual interest rate.

Dealing with a factor can also be much more difficult than with a commercial bank. Banks are highly regulated, offer competitive rates and commoditized lending services, so entrepreneurs can, with few exceptions, easily anticipate the cost and terms of their loan. But factoring is very fragmented. Most factor financing is provided by smaller, unconventional lenders. It is much less regulated and the quality, reliability and integrity of factors vary widely.

The reason more startups are turning to this more expensive, risky alternative is simple: It is often the only way to get cash. And if it is the route you decide to pursue, due diligence is the single most important step. Investigate how long the factor has been in business, where its offices and headquarters are and the background of its management team. Ask for referrals from current clients, and research complaints or lawsuits using web searches, the Better Business Bureau and the state's Attorney General's Office. Also, trust your gut: If you feel you can't build trust with the factor, don't pursue the loan.

If you go forward, review your contract with a magnifying glass, particularly these points:

• What is the duration of the contract? The shorter the better–ideally, month to month. You want to switch to less expensive financing as soon as possible.
• Will the factor negotiate? Some factors allow contract negotiations while others offer only take-it-or-leave-it documents.
• Must you provide a personal guarantee? This allows the factor to go after you and your assets to be repaid. Some factors will lend without a personal guarantee or on a “non-recourse” basis.
• Will the factor take possession of your receivables if they are uncollected? Probably not, which means you'll need to collect on your own. Be prepared: If receivables are uncollected, you'll need to repay the factor's advance or you may lose financing altogether.
• How will the factor notify your customers? Ideally, the factor will create a lockbox to accept payments in care of your company. You maintain day-to-day contact with your clients so that everything appears seamless and they are not aware of your financial situation.
• Will you be required to factor 100 percent of your receivables? Cash flow and collections patterns fluctuate, and some weeks you may not need financing. If your factor requires you to finance all receivables, you will pay dearly for financing even when you don't need it. Single-invoice or spot factoring allows you to opt out.
• Is there a minimum or maximum sales requirement? Some factors require a certain sales volume. If you are not within the limits, you may lose your financing–so the fewer restrictions, the better.

Finally, always keep the end in sight. The real goal with factoring is to improve your cash flow, increase liquidity and rebuild net worth to qualify for commercial bank financing. Commercial bankers can help you figure out the financial targets that can help you re-qualify, but it is up to you to create the plan.

As a commercial lender, I have seen businesses resort to factor financing for one or two years at the most. If the company still didn't qualify for bank financing at that point, chances are, it was already out of business.

Factoring financing in Canada is a proven, and growing in popularity method of generating cash flow and working capital for your Canadian firm. It often works best in conditions when your firm is experiencing higher than historical growth, or in many cases you are a start up or early revenue company who requires additional cash flow that you might not be able to attain from Canadian chartered banks.

In speaking to many clients factoring is clearly mis – understood. Last week we got a call from a customer who inquired whether we purchase bad, uncollectible accounts receivable. We indicated to that customer that what she in fact wanted was a commercial collection agency! Factoring in fact is the opposite of that, it's the purchase of your accounts receivable ( and we mean the collectible accounts ! ) for immediate cash flow .

Factoring in Canada is somewhat of a fragmented industry, so we encourage you to seek and speak to respected and credible business financing and factoring advisor. The type of firm you end up dealing with in factoring will often affect how successful you viewed this type of financing strategy. There are a number of different types of factoring in Canada. Technically speaking we can refer to the types of factoring in the following manner -

Full notification invoice factoring (This is the U.S. and British model)

Non notification factoring

Spot factoring

Factoring in the context of a true working capital or asset based line of credit facility

We are always concerned that customers, armed only with a little bit of information or their first contact with a firm who only offers one type of factoring, will get themselves into the wrong type of facility, thereby tainting any future positive thoughts they might have on this type of financing. The bottom line again – you can speak to an unbiased expert on how this financing can help your firm, or you can choose a hit and miss approach and enter into the wrong type of financing facility. We will take option # 1 any day!

Let's talk a bit about factoring in general as opposed to focusing on which type of factoring best suits your firm. This type of financing is essentially the purchase of one or all of your receivables, on a one of, of on going basis, to facilitate immediate cash flow.

Remember also that you are not incurring any debt when you are factoring – in fact your balance sheet improves because you are turning over receivables / working capital in a more efficient manner.

Because there is a cost associated with factoring you should generally be comfortable that you have the proper gross margins for the factoring of your accounts receivable. Very low margin businesses, even though they have good turnover are not always best suited for this type of financing.

In summary, factoring is growing in popularity. At the same time the myriad of types of firms that offer this financing, as well as the way in which they offer factoring can ultimately affect whether your firm is a successful user of this financing strategy. Investigate the benefits of this type of financing, ensure you understand who is offering it to you and which 'factoring model 'they use, allowing you to better determine if financing in this manner suits your cash flow and working capital needs . That 's proper business decision making!

truck factoring

Accounts Receivable Factoring is really a technique of increase the amount of cash for your business. The businesses that will be capable to do this are the ones which are business to company. Should you don't do this, then you will not be capable to have your invoices factored. Factoring is really a way of discounting your invoices and selling them to investors or factoring companies. Some variables will determine the factoring fee that you will have to pay for invoice factoring, but generally the fees will be low.

From Yahoo:

“The Royal Bank of Scotland Group plc has agreed the sale of RBS Factor SA to GE Capital,” the bank said in a statement. Factoring is the process whereby cash is advanced to businesses, as a proportion of revenue from invoices issued. The debt is reassigned towards the factoring company, which enables them to collect it. RBS, which had sold already its German factoring division to GE Capital in March, did not disclose how much will be paid. Both deals are subject to regulatory approval and expected to complete by the third quarter of 2010. RBS added: “As part with the group's strategic plan, announced in February 2009, this business was placed within the non-core division while the group sought a new owner having a long term commitment to the factoring sector in France.”

The Factoring Buiness is certainly large. If you will find sufficient margins to account for the factoring fees, then this can take your business towards the next level. Increasing the bottom line and giving your company the growth that it is asking for is one with the greatest points that you can do for the company. Certainly appear into obtaining your invoices factored so that you usually appear at your options.

There are a number of business to business firms around that can use enhancements on cash flow. Quite often, a few firms will have invoices dated anywhere from 30 to 90 days. During this time, the company has already sold the product or service, and it's waiting around to get paid.

To recieve funds right away as opposed to waiting for the client to pay, you can get your accounts receivables factored. Some individuals refer to it as invoice funding, and others will say that it's invoice discounting. In any event, it will be the identical end result. You will be selling your invoices to a firm for a discounted price. This discount will usually be between 1 and 6 percent. As opposed to looking at the credit rating of the company, the factoring or financing company are going to be checking the credit of your client. They are going to also look at various other info just before cutting a check. Just how much that they can provide you with in advance will also fluctuate. For an example, they might give you 80% of the value of the accounts receivable.

When the client pays, they will pay you the rest of the money, minus their fees. This may help plenty of companies out there. It is possible to help enhance your working capital as well as help boost the growth of the company. Certainly, if the company doesn't have enough margins to handle the service fees of getting your invoices financed, then this business financing model isn't going to work out. The great thing is the fact that this strategy can help out lots of companies. account receivable factoring and RBS Factoring are good information sources.

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