Canadian business owners and financial managers often ask about assessing the different alternatives to their overall business financing strategy. Receivable financing – factoring can be one of the cornerstones of a creative alternative financial solution for their business. We sometimes hesitate to use the word ‘alternative ‘because quite frankly this method of financing is becoming as mainstream as things can get!
Canadian business can be financed in one of four different ways. You need to be able to asses the methods utilized in those four categories and which one, or ones, makes sense for your firm.
Business is financed of course by your own shareholder equity. Equity is expensive because when you give it up, or sell ownership in your business your overall position becomes diluted and your return on investment diminishes.
The three other methods of financing, in lieu of equity of ownership relinquishing are:
Debt of course comes in the form of good debt and bad debt – we would, as an example categorize a commercial mortgage as good debt – a cash flow working capital loan might be another example. However, the reality is that most business owners recognize the dangers of debt and how that increased leverage can be a double edged sword.
Clients are always asking us about ‘governments grants and loans.’ In our opinion there are only two respectable grant/loan programs in Canada – the SR&ED program, and the CSBF program – the former is a non repayable grant, the latter is simply a great government loan for financing equipment and leaseholds.
So that brings us to # 4- Asset financing. Depending on the type of business and industry you are in your asses include inventory, land, equipment, and receivables.
A very strong case can be made that #4 should in fact be #1 when it comes to working capital and cash flow financing. Simply speaking your assets need to be monetized in the best manner in which to bring you liquidity.
Receivable financing – factoring is in fact the quickest and most efficient manner to bring immediate cash flow to your business. Why is that the case – simply because it involves no debt coming on our balance sheet, no payments are made as in a loan type scenario, cash flow is immediate, and the reality is, that if you have negotiated the right factor facility then you are in control of your overall cash flow requirements?
The benefits of a receivable financing factor facility are very clear once you understand the process. Generally a factor facility, aka an invoice discounting or receivable financing facility can be negotiated in a couple of weeks from start to finish. To the extent that your business is growing you essentially have successfully completed a financing that gives you unlimited cash flow. We say unlimited, because if your sales and receivables grow your cash flow and working capital grow in lock step to that growth!
Cash flow and working capital from a factor facility can be used to increase inventory, take on more purchase orders and contracts, and, in general meet working capital guidelines.
The overall process for a receivable financing – factoring facility is simple. You sell some or all of your invoices to your factor partner firm. You receive generally 90% of that invoice amount that same day as cash in your bank account. When your customer pays the factor firm keeps a ‘discount fee ‘based on the total time it took your customer to pay.
Discount fees, or as clients prefer to call them, ‘factoring rates ‘vary in Canada. Factors (excuse the pun) that affect your fee are the size of facility, who you deal with, the method in which your facility operates, and the overall quality of your customer base.
Speak to a credible, trusted, an experienced business financing advisor – Find out today why the 4th method of financing your business might just be the best!