Factoring companies deal with financing business invoices from those that experience cash flow issues caused by slow-paying clients. Factors do not lend money; instead, they buy the businesses’ accounts receivable at a discount and give the business ready cash to increase their fluidity. When the invoice has been fully paid the factor makes a small gain.
Most of the factoring companies provide invoice factoring as the main product and can work together with businesses in most of the industries. Some are general factors whereas other factors serve a specific industry for example transportation, medical and construction.
Factoring can finance almost all industries where invoices are paid in 30 to 60 days. The common industries that use factoring include trucking, owner-operators, freight brokers, business services, manufacturing and staffing agencies. Others are wholesale, technology, janitorial, courier services, call centers, security services, consulting, diagnostic centers, medical offices, private investigators, IT consultancy, distributors, landscaping, advertising, food service, import, logistics and more.
Working with factoring companies brings several benefits to business. These include immediate improvement of cash flow, no more dealing with tied cash in receivables, your cash will be free for new purchases, and they work with the business owners with bad credit, increased financial lines and can work with small and start-up businesses.
Factoring is right for you if your clients both government and commercial pay within 30 to 60 days, and they have excellent credit. The slow payments should be your primary cause of cash flow problems. The factor deposits the first installment, usually between 70 and 95% of your gross invoice values and the remaining is paid into your bank once the invoice is fully paid. The second installment called rebate usually covers the remaining percentage less financing fee.
Factoring is basically a transaction where the business sells its receivables or unpaid invoices to a third-party financier called the factor. The factoring company collects the payment from the clients of the business and charges a small fee. It is also referred to as accounts receivable financing in some industries.
Companies use factoring mainly because they need quick cash on the slow paying receivables. They may not have the time to wait 30 to 60 days for the payment to mature. Factoring is an easier way for businesses to build up cash flow that makes it possible for them to pay suppliers and employees for business continuity.
When your invoices are factored, you get a cash advance as a percentage of the invoice value. This is usually done within 24 hours. Once the invoice is paid in full, the factor will then give you the remaining amount less their financing fee. The cash advance rates usually vary with the industry and the factoring companies chosen. It can range between 70% to as high as 95% depending on your industry, the customer’s credit history, and other parameters.
There are two main categories of factoring:
- Recourse factoring: it is the most common type of factoring and is cost effective. You get the advance funds, but in the case of unpaid invoices, you have to refund the factor after a certain amount of time. The risk is assumed by the business owner, and there are various competitive rates for this type of factoring.
- Non-recourse factoring: this type releases the business from any liability in the case of unpaid accounts. It is, however, more costly since the factor takes the responsibility and does the leg work.
Factoring companies are financial service providers who finance business cash flow in exchange for the unpaid invoices at a fee. They assist companies, and even small businesses open up their cash flow when customers are slow to pay. They charge a factor fee to facilitate this financing of invoices.
In general, some factoring companies in Canada are better than others in terms of their terms, rates, speed and fees. There are those that offer 100% online paper-free solution with transparent terms and quick funds approval to help solve cash flow issues for businesses. There are those that allow you to connect it to your accounting or invoice software then select the invoices you want to sell to them. Factoring companies have varying rates of factoring fees, but generally, the rates are as low as 0.5% of the invoice value per each week the invoice remains unpaid. Get from as low as $100 to $100,000 upfront on your outstanding accounts receivable. Once you apply, your funds will be in your bank account within 24 hours. It is one of the best factoring companies that supports small businesses with low cash value requests.
Operating a business, small or large, come with its fair share of stress and risks on every front. Financial stress is the most common with companies facing cash flow problems every month when the time to pay bills comes. Collecting on the accounts receivable in time can be a major challenge for many companies especially when the receivables threaten the financial well-being of the business.
The best way to get your finances on track is to use the factoring companies using the receivables as collateral. When your customers repeatedly make late payments, your cash flow planning will always be disrupted causing you more challenges with employees, suppliers and your credit standing for the smooth running of the business.
Also called invoice factoring, this financing option gives you a chance to get cash immediately for 30 to 60 days invoices and sometimes even 90-day invoices. You essentially sell your outstanding invoices when you factor them. You are rid of the debt collection stress and also get cash immediately for a small fee so as to focus on providing the service or selling your products. Even if the factoring firm does not take responsibility for the invoice, the business still gets the much-needed cash to run the business operations.
The factoring companies give between 70-95% of the invoice value and keep the remaining 5-30% in reserve. As soon as the invoice is paid in full, you will get the reserve amount less the factoring fee. This fee varies with the factoring company chosen and is charged weekly till the invoice is fully paid.
This is a financial transaction where a business sells its outstanding accounts receivable to the factor so as to free up the cash for other immediate uses. It helps companies meet expenses like purchases, covering the payroll among other bills. This financing option lets you turn the unpaid invoices into quick cash to improve cash flow. The term invoice factoring can be used interchangeably with receivables factoring and accounts receivable factoring.
Most businesses give credit terms to their customers, and these can go for as long as 90 days before you see the money. Within this time, other business operations have to go on; you need more supplies; therefore, you should pay the suppliers in time, pay employees and utilities for the business to function normally or even grow. Without the cash, so many opportunities can pass you by resulting in a failure to expand your business when the time is right.
With invoice financing, most of these challenges can be eliminated. This process involves three parties: your business, the customer owing the debt and the financing company which buys the invoice. When all three do their part, everything will run smoothly to your advantage.
Once you deliver products or service to the customer, you issue an invoice which you can then sell to the factoring company to get a cash advance of between 70 to 95% to cover the outstanding invoice at a fee. All the three parties gains in this arrangement: the customer gets favorable terms and days to pay, the factoring company gets their fee while your company gets quick cash to fund the business operations.
This type of financing allows businesses to use their receivables as collateral to get financing instead of waiting for the invoices to mature. You can secure a cash advance using the outstanding invoices as security to shore up your cash flow for operational efficiency and business survival. It is a very powerful way of unlocking the tied up cash to improve business operations and even expand the business turnover.
It is more efficient and fast selling your invoices to factoring companies at a small fee instead of waiting the full term of the invoice to get paid. There are two types of receivables financing:
- Asset-based lending also called the business line of credit that is based on the company’s balance sheet and comes at a significant fee to the company. The majority of the business receivables are committed giving little flexibility to the business.
- The other is the traditional factoring where the business sells specific accounts receivable to the factoring company with the initial installment being less than the total value of the invoices outstanding. Businesses have more flexibility in selecting which accounts to sell.
- In the case of selective receivables finance, the company has the freedom to choose the receivables to use for advance payment. It allows the company to get full payment for each receivables account and have relatively lower financing rates than the asset-based option. It may not be categorized as a debt-based financing since it stays off the balance sheet and does not affect the debt ratio of outstanding line of credit.
This is a crucial branch of factoring that deals with the transport sector. In this industry, payment is usually made only after the goods have been delivered to the destination. However, between pickup and delivery, there are so many activities and expenses the transporter must meet. These expenses have to be incurred whether the client pays or not and even after delivering the service, they have to wait for 30 to 60 days before receiving payments. This can jeopardize continued operations of the trucking business, especially for a small owner-operator business.
These expenses include loan repayments, fueling, repairs, breakdowns, and driver’s pay, burst tires among other maintenance and daily expenses. Al these creates cash problem for the transporter and can affect his ability to provide the service. Bank financing is too expensive and demanding that it cannot solve this kind of challenge for the transporter. They will want records showing the profitability of the trucking business that can be very difficult to a freight broker or a new transporter.
For a rapidly growing freight company, factoring companies can be very good partners. They help convert the slow paying customers’ invoices into quick cash for business growth. As long as you can provide service to many reputable clients with good credit ratings, you can get good financing at favorable rates.
Simply create an account receivable factoring agreement with the chosen factoring company then submit a copy of the invoices you want to sell to the factor. This way, you can free up the cash to finance regular operating expenses for the successful running of your business.
Free Factoring Consultation
We provide free consultation on factoring to help small companies in Canada get out of cash flow challenges. There are great factoring companies that we have recommended and have a long-standing reputation in the market. Getting financing is very tough today especially for small or owner-operated business. But with factoring, all that matters is your outstanding invoices and the credit rating of your customers.
The small sizes of start-ups and small companies prevent them from maintaining a healthy cash flow all through the month especially with slow paying customers or when customers delay in paying as per the invoice. Invoice factoring is the best solution to the struggling business which are held back by outstanding accounts receivable to the extent that they cannot grow in spite of the competitive advantages they hold over the competition.
There are some excellent and bad factoring companies in the market, there are also those that specialize in certain industries whereas others serve the market in general. This is why we exist, to advice clients on the best factoring company to work with for a successful business operation. Take advantage of the solution today and get out of the stuck position where you cannot finance your business expenses. Talk to us today and see your financial troubles vanishing.