It's probably just us, but when it comes to business financing in Canada no other method of financing your business is as controversial or misunderstood as sales of receivables financing, aka factoring funding.

Let's examine some key points that will clarify the ' Good, Bad and Ugly ' of receivable financing in Canada.

Let's start off with the ' good ' as we think you will soon might find that the ' bad' and the ' ugly ' are simply misunderstandings , but we'll let you decide.

So whey do Canadian business owners and financial managers embrace this newer form of financing in Canada. Simply because it supercharges your cash flow - by selling your A/R you in effect maintain cash flow for operations, and eliminate the need for additional debt or taking on or putting in new equity. We constantly remind clients that the dilution of your equity is in fact the costliest method of financing, everyone pretty well agrees on that.

Another point in our ' Good ' column is that if structured properly your sale of receivables financing sets you up for unlimited capital and cash flow - simply speaking your working capital grows lock step with your sales. Not too many other methods of business financing can make that statement.

The Ugly. The following point is simply the most recognized complaint when we talk to clients. It involves the mechanisms under which A/R financing works. 99% of the structures used by factor companies involve the factor firm validating the credit worthiness of your clients, and getting involved in the billing and collecting of your receivables. Why. Their answer would be that you have sold them the receivable and it’s theirs to collect.

So that’s bad, right? Most Canadian business owners and financial managers that we speak to would say they would prefer to bill and collect their own receivables, and maintain those client relationships that are so important. Enter ' the good '! Here's the good news, most Canadian businesses contemplating sale of receivables funding / factoring are eligible for what we term ' Confidential receivables financing ‘. Utilizing that mechanism your firm bills and collects its own receivables, maintaining total control on the billing and collection function. You in term remit those funds to your finance firm, simply because you have been advanced those funds already.

The Bad. Here is where misunderstanding reigns supreme in A/R financing. It's the ' price ' or ' cost ' of this method of business financing. When you finance a receivables portfolio a factor firm buys your A/R at an ongoing discounted price. That price, on balance, in Canada is 2-3%. Business owners in Canada confuse that purchase discount fee as an interest rate, and that’s a large part of the problem. In reality its how you manage that 2-3% that ultimately reflects your total cost of financing. You can manage that cost by adjusting part of the cost into your cost of sales - we remind you that you’re already absorbing a large cost by carrying receivables and inventory already.

And by the way, with that new found sale of receivables funding cash flow you can now take supplier discounts if they are offered, which by the way, are generally in the 2% range. Want more good, rather than bad or ugly?! You can now enhance your purchasing power with suppliers, and if you choose (not always recommended by us) you can offer extended terms to your clients that your competitors might not be able to.

The bottom line today. Thousands of Canadian businesses embrace sale of receivables funding / factoring everyday. Consider speaking to a trusted credible and experienced Canadian business financing advisor to wade through the good of this method of business finance, and you might just find that bad and ugly are either misunderstood or don't exist . That’s a working capital solution!

Author's Bio: 

Stan Prokop - founder of 7 Park Avenue Financial –
Originating business financing for Canadian companies , specializing in working capital, cash flow, asset based financing . In business 7 years - has completed in excess of 80 Million $$ of financing for Canadian corporations . Core competancies include receivables financing, asset based lending, working capital, equipment finance, franchise finance and tax credit financing.
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