Receivables finance in Canada is a solid fix when companies find themselves on the brink of cash flow collapse. But do business owners / financial managers really understand the ‘ math ‘around ‘financial factoring ‘? Let’s dig in.

The key to understanding the benefits of this option in Canadian business finance is ensuring you know how the math works. Simple perhaps? But often significantly misunderstood.

When businesses don’t qualify for some… or all of the financing they need (especially when they are growing), fnancial factoring becomes a very solid source of capital for cash flow. Typical advances are in the 80-90% range based on receivables under 90 days old. (A receivable greater than 90 days old infers potential uncollectability) The balance of the receivable, i.e. the additional 10-20% is a temporary hold back that’s released as soon as your client pays.

So far so good, right? Here’s where a common sense understanding of the arithmetic comes in. Let’s assume your company has a gross margin in the 40% range, not uncommon depending upon your industry.

Using a $ 10,000.00 invoice as an example your gross margin of $ 4000.00 can be put to work the same day you issue that invoice , for the simple fact that a Receivable Finance solution provides you same day cash ( if you choose ) for sales revenue generated by your firm . The benefit? Your new found ability to generate even more sales and profits by putting that cash to work in a same day timeframe.

Many businesses fail to recognize, or calculate ( there’s that understanding the math again ) the cost of carrying receivables and being unable to take ‘ QUICK PAY ‘ supplier discounts that are offered be vendors . While the cost of A/R financing is typically a 1.5 – 2% fee that amount alone can often be recovered by taking vendor discounts!

For customers that have access to ‘ all ‘ the bank credit they need that might seem like not a big deal , but for firms that are forced to self fund and manage cash flow almost hourly that becomes a huge consideration.

The main ‘ misunderstanding ‘ around the cost of financial factoring of receivables lies in the fact that bank rates need to be viewed as an annual borrowing cost while A/R financing is a ‘ fee ‘ , not directly comparable .

Traditional Canadian factoring solutions come from U.S. and British firms that have marketed the same offering for hundreds of years, and quite successfully. We encourage clients to consider ‘ CONFIDENTIAL RECEIVABLES FINANCE ‘solutions that mirror the day to day operations of a bank facility – most notably your ability to bill and collect your own accounts with no notice to clients, suppliers, etc.

If you feel like you might be missing the right considerations in A/R finance in Canada, or if you want to rescue your cash flow ‘ from the brink ‘. seek out and speak to a trusted, credible and experienced Canadian business financing advisor who can assist you with your receivables finance needs.