A/R Financing / factoring in Canada are significantly misunderstood when it comes to pricing, how it works, etc. For that reason we’ve met clients that actually ‘ hated ‘ it! So our message… stops hatin’ it and try and be somewhat more flexible in getting educated about how this method of business financing works.

And most importantly, understand this business financing model, how it works, and how to assess the true cost. Most people would agree that successful entrepreneurs and business people are the ones that took the time to listen to new ideas about anything that will make their business more productive from a cash flow and profits perspective.

So some might be thinking now… ” .. Sounds complicated?’The reality, not really. AR financing is simply a 3 way mechanism between your firm, your finance partner, and your client with a focus on obtaining cash from your receivables investment.

And the reason it works when other forms of finance might not be accessible? Simply because the essence of collateral on the transactions are the value and quality of your A/R. It is not, we repeat… NOT… a loan based on your firms particular financial standing.

Pricing, while often pitched as ‘ complicated ‘ by others is the crux of today’s message to clients and others. While the common belief is that factoring is expensive this is not necessarily true. Oh by the way though, dealing with the wrong partner might be your biggest mistake when it comes to selecting a factor partner, but there enough solid financing firms out there who can make your ‘ partnering ‘ decision easy when it comes to financing your business for cash flow.

One of the misunderstood essences of factoring in Canada is the concepts of ‘ asset turnover ‘ and ‘ return on investment ‘. That’s because 99% of the clients we initially meet seem to have reviewed and investigated everything except these two concepts, which in fact are the essence of factoring. So they can be forgiving for having focused on all the wrong issues.

So, asset turnover and return on investment. How do they play a key role in the factoring decision? They do that by the Canadian business owner and financial manager recognizing that there is a trade off in that they can now use the cash flow generated by the factoring transaction to grow and sell more. That is then benchmarked against the cost of A/R financing, so if your firm has solid gross margins, is growing, and needs to invest in working capital accounts such as inventory, etc you have probably just found the perfect method of financing your company!

We always strive to paint a balanced view , so we would be remiss in saying that AR finance sometimes is also very suited to firms that have significant financial challenges and cant obtain financing elsewhere , but the optimal scenario is when your firm is growing, generating some profits, but just unable to access the capital you need.

The actual arithmetic around how factoring is pricing is again very simply – sometimes the industry itself does a poor job of laying out that pricing. The only elements of the pricing are the amount of your invoice, the discount rate you are being quoted, the amount of the advance against your a/r, expressed as a percentage, and finally .. The time it takes you to collect your invoice. The faster you focus on collection the lower your financing costs.

Bottom line today… be open and flexible in understanding how receivables finance works. Seek out and speak to a trusted, credible and experienced Canadian business financing advisor who can assist you in setting up a facility that works for your company.

P.S. Don’t forget to also check out confidential invoice financing, allowing you to bill and collect your own receivables under your total control.