We rarely meet a client who is comfortable enough to say they are a ‘ Master ‘ of AR financing pricing when it comes to receivables financing in Canada. Let’s see if we can help you achieve some ‘ Master ‘ status in this often confusing (but shouldn’t be) area of business financing in Canada.

So why is there a combination of mystery and clarity around using just your accounts receivable for cash flow and working capital financing. It’s key to remember that when you look at this type of financing it’s important to understand what is happening, shall we say ‘ beneath the transaction’. Because factoring/receivable financing in Canada is essentially the sale of you receivable and that’s how it must be both recorded in your book keeping and accounting.

Let’s get some of that ‘ boring’ accounting out of the way quickly. The entry is pretty basic – it’s a ‘ CREDIT ‘ to your receivables and a DEBIT (that’s an increase in your cash by the way) to your cash account. Mission accomplished!

Since your factor company / financing partner takes a discount fee for purchasing your receivables, either once, or on an ongoing basis you also have to take into account the financing charge, so that’s an additional entry as a DEBIT to your interest account .

One final entry, and we promise, it’s the last one, but when complete you will have now understood the actual mechanics of AR finance pricing. That entry involves the ‘ holdback ‘ since typically you receive only 90% of your invoices as cash as you generate them. The 10% is a holdback; – you receive that when your client pays, so you need to set up one final entry as ‘DUE FROM FINANCE FIRM ‘.

If we had to be honest (that’s our preference always!) we would have to say that our favorite/ recommended method of financing receivables is a Confidential Receivable Financing ‘arrangement – that is one in which your firm bills and collects your own receivables, with how you finance your business being your own business!

That type of arrangement still allows you to receive all the benefits of receivables finance:

Immediate cash on your sales generations
Balance sheet strength
Ability to take supplier discounts and achieve better vendor pricing

Etc!

Seek out and speak to a trusted, credible and experienced Canadian business financing advisor who can help you simplify Canadian receivable financing.