Is your small business finding it challenging to keep cash flowing? It’s far more common than you might think, and even notably successful businesses find that liquid capital can be lacking. That can be a difficult situation in which to find yourself, particularly if you’re waiting on an invoice to be paid so you can move on to the next project, pay your employees or expand your company. Thankfully, invoice factoring in Canada can provide you with the infusion of cash you need, without the drawbacks that go hand in hand with conventional lending. Not sure what invoice factoring is? We’ll discuss that and other important details below.
What Is Invoice Factoring in Canada?
Let’s start with the basics – what is invoice factoring? Essentially, it’s a globally accepted financing solution for businesses that are turning a profit, but have much of their capital locked up in unpaid invoices, making it unavailable for immediate use. Generally, it’s better suited for B2B companies, and those with clients that pay their invoices every 30, 60 or 90 days.
If that sounds like you, then you already know it’s possible to be in the black and still not have the capital needed for daily operating expenses. After all, those invoices represent money that belongs to you – it’s just not in your account yet. You’re stuck waiting for your clients or customers to pay up.
Invoice factoring in Canada allows you to tap into that capital and use it now, rather than waiting for later. This can mean the difference between slow stagnation and growing your business. It delivers the ability to move from serving one client to the next one without having to wait in the meantime, during which period a competitor might snag your would-be customer.
How does the process work, though? Really, the it’s pretty simple. You’re just selling an existing asset for cash. If you’ve ever sold an old piece of equipment, or one that you don’t use, in order to get some extra money, you’re familiar with how this works and the benefits offered.
In this instance, the asset we’re talking about selling is an unpaid invoice. You sell that invoice to a factoring company. In return, the factoring company advances you a percentage of the invoice total, which you can then use for whatever it is you need, from paying employees, to buying supplies or materials, and growing your business. Once your client pays the invoice, the factoring company will assess a fee you agreed to beforehand, and then pay you the remainder of the invoice value.
Couldn’t you do the same thing with a bank loan? No, not really. There are also additional benefits to invoice factoring in Canada unavailable with conventional lending. There’s no credit check conducted on your business. There’s no loan to repay. In fact, the entire process depends on the creditworthiness of your client, although that does make it important to only factor invoices from clients you know will pay.
Sounds simple, doesn’t it? It is, but there are things that you’ll want to know before you take advantage of invoice factoring in Canada. This brings us to our next area of discussion – crucial elements in the invoice factoring process.
How Invoice Factoring in Canada Actually Works
While we’ve broadly outlined the factoring process above, there’s more to it, and you’ll also find there are quite a few different factoring companies out there that have different practices and requirements. Let’s take a few moments to address some of the things you’ll need to know when choosing between factoring companies.
The Advance Amount
One of the first things you’ll need to consider with invoice factoring in Canada is the amount of the advance. As a broad rule, you’ll find that most factoring companies will advance you between 70% and 90% of the invoice total. However, that’s not true across the board. Some companies stick closer to the minimum amount, while others might go as high as 95% or even 98%.
Obviously, the more money you have access to upfront, the better you’ll be able to address your cash flow needs, right? True, but that’s only part of the equation.
Some companies do offer more upfront, but charge a higher factoring fee, which will eat into the balance of the invoice amount. Other companies tack on additional charges and hidden fees that will eat into your profits. Therefore, you need to choose your partner with great care.
Consider the Speed
While factoring is far faster than getting a loan through a bank, you’ll find that some factoring companies tend to drag their feet a little. This is particularly true if you’re a new client. In a best-case scenario, you can have your money in as little as 24 to 48 hours. However, some companies do enforce a four to five day waiting period during which time they check the credit of your customer and determine the risk level inherent with factoring the invoice.
The Factoring Fee
Invoice factoring in Canada comes at a cost. At the minimum, you’ll be charged a factoring fee. This runs between 1% and 5% of the invoice total, and is only assessed after your client pays the invoice. It’s taken off the remaining balance (called the reserve), and then you receive the remainder.
Obviously, you want to work with a company that charges the lowest factoring fees, but you might find that the advertised rates mask other charges that ultimately increase your costs of doing business with the firm.
It’s important to look over your contract thoroughly before signing to ensure that you’re able to determine exactly how much you’ll be paying in addition to the factoring fees. Some companies charge application fees, filing fees, account management or maintenance fees, and others.
The Importance of Specialisation
While it’s possible to work with a generalist factoring company, it might make more sense to work with a specialist factoring firm depending on your industry or niche. Generalists might be willing to work with pretty much any client, but they lack the in-depth knowledge of some industries and how they work, which can lead to higher than desirable fees, or even being turned down in the first place.
For instance, transportation, manufacturing, staffing, construction and technology companies would all benefit from working with a specialised firm, rather than a generalist. In addition to familiarity with how your industry works, a specialised firm can also offer perks and benefits that you won’t find with other factoring companies. These value-added items can increase the benefits of working with the company, and even help you grow your business faster.
Long-Term Contract or Spot Factoring?
You’ll find that factoring occurs in two broad types – spot factoring and long-term contracts. While both will give you access to the capital you need, they’re not the same. For many companies, spot factoring is the better option. This is really nothing more than the ability to sell a single invoice on a one-time basis.
If you need a brief infusion of cash, or you work with many clients but rarely more than once, this can be a good option for you. However, it does usually come with higher fees, which will increase your costs in the end. It’s also not offered by all companies providing invoice factoring in Canada.
Long-term contracts are more common, and can be a good fit for companies who work with the same clients for longer periods. In this instance, you will agree to sell all the invoices from that particular client to the factoring company for a set amount of time, often one to two years, although the duration can vary significantly from one factoring company to the next.
Long-term contracts are generally more affordable, with lower fees overall, but they can lock you into a relationship with that particular factoring company. That may not be a good thing if they ultimately end up being a poor fit for you, or your needs change during the contract period. Breaking the contract is usually very expensive and should be avoided.
Ultimately, only you will be able to determine if spot factoring is the right fit for your needs, or if you’d benefit more from a long-term contract. Take stock of your situation – do you work with the client on a regular basis? Is this a one-time invoice? Do you have more than one invoice that could be sold? Answer those questions and you’ll have a better understanding of how to proceed.
Of course, you might be wondering whether your business is a good fit for invoice factoring in the first place. We’ll discuss that in the section below.
Are You a Good Fit for Invoice Factoring in Canada?
Not all companies will benefit from invoice factoring in Canada, despite its ability to deliver a vital infusion of capital. How do you know if this is the right option to help your business grow? You’re a good fit for invoice factoring if the following criteria apply to you:
- You have unpaid invoices and need cash flow.
- Your invoices are done on a net basis, either 30, 60 or 90 days.
- Your clients are low risk and have a history of paying their bills on time, every time.
- You don’t mind giving up some measure of control to the factoring company in the form of billing and collections.
- You need more free time to focus on growing your business, rather than on back-office duties.
- You can afford not to recoup 100% of an invoice.
If any of those situations applies to your business, then you are a good fit for invoice factoring in Canada. However, you’ll still need to know how to choose the right factoring company, which can be daunting if you’ve never used this type of financial tool in the past. That brings us to our next topic.
How to Choose a Company Offering Invoice Factoring in Canada
Before searching for a factoring company, make sure that this is the right option for you. In some instances, you might be better off with a conventional loan or a line of credit. However, if you fit into the categories we mentioned previously, then invoice factoring in Canada can have a lot to offer your business.
Your next step will be to find several factoring companies and compare them. You’re looking for quantifiable elements that will help you sort through your options and ultimately find the right factoring company from the multitude out there. Once you’ve found several that seem to offer the right mix of features and benefits, you need to interview them.
Ask about how much experience they have with clients in your industry, about their fee structure, about the length of the contract and the repercussions for breaking a contract. Ask about their collections/billing process and how they will treat your clients.
Make sure to ask for referrals (current and past clients) and then follow up with those companies to learn more about how they were treated. You’ll also want to learn more about each company’s financial situation, how long they have been in business, and their reputation as a factoring firm.
Once you’ve winnowed through your choices and have two that seem to be worth your time, submit an application with each one. Make sure to include all the pertinent information (complete the application package in its entirety). Then, go over both contracts with great care. Focus closely on the fine print, as this is where you’ll often find hidden fees and charges, as well as terms that might make your working relationship difficult.
For most business owners, the process of choosing a partner for invoice factoring in Canada can be time-consuming and frustrating. Thankfully, there’s help available.
Need a Hand?
We’ve found that most business owners struggle to find the right company offering invoice factoring in Canada. Just finding a few companies to compare can take a great deal of time, and that’s time that you’re not spending building your business. Then you need to make a side-by-side comparison of each firm’s offerings, contract terms and more – it can be exhausting and confusing.
We can help. We’ve built a reputation based on providing outstanding solutions to our clients seeking the benefits of invoice factoring in Canada. We invite you to take advantage of the free consultation we offer with one of our factoring specialists. You’ll appreciate how simple and streamlined we can make the process of finding the right factoring company.