How Receivable Financing and Factoring Turns Cash Flow for Business Challenges Into Opportunity

The chance for business owners to turn adversity into opportunity comes around rarely. The ability of your company to turn cash flow for business challenges into a major win in working capital and cash flow might just come from one of Canada’s newer forms of business financing, called ‘ receivable financing ‘.. more commonly known as factoring.

For small and medium business it seems to always come down to two basics – getting the order, and then getting paid. The old ‘ cliché’ of ‘ the order is not complete until it’s paid for ‘… as trite as that sounds, seems to hold true even today.

Many clients we meet with are in the enviable position of getting larger orders and contracts than they might have imagined based on their innovative products and services. But with that success, as we noted, comes the challenges of cash flow financing. During the past few years with all the economic turmoil it seems Canadian business financing options seem either limited or have disappeared – that’s certainly how many clients feel. The impact of accounts receivable growth is a huge challenge, not to mention inventory also of course.

So we have waxed eloquent on the problem- That’s easy to do. let’s talk about the solution. Receivable financing, also known as factoring addresses the issues of your customers paying you in 30.60, or dare we say it, 90 days. You can carry those receivables, or…. utilized factoring as a method to turn your sales into immediate cash.

Let’s cover off some of the basic requirements around how this innovative method of business financing works. When you sold the product or service you hopefully had enough gross margins in your cost of sales to make the sale profitable. If you are able to sustain another 1- 3% of gross margin erosion you can use receivable financing to turn sales into same day cash, which is what this financing is about.

Let’s reveal and recap in a manner you can understand how this financing works. Your purchase orders or contracts must be ‘ clean ‘ from a viewpoint of being able to demonstrate you can recognize revenue on your shipment. We should interject at this point that the banks will finance your receivables also, but that comes with much stricter criteria and limits on the amount you can finance.

That is why factoring has risen in popularity, it provides unlimited… yes… unlimited same day cash flow for your sales. Your challenge is to work with a trusted, experienced and credible business financing advisor who can steer you to the right partner with the type of facility that works for you. Although traditional factoring along the lines of the U.S. model requires your customer to be notified we are in fact a fan of this type of facility that allows you to bill and collect your own receivables, for all the obvious reasons.

It’s important for clients to understand at its most basic how factoring works. You are advanced, on the same day as you invoice approx 90% of funds for your invoice. The remaining 10% is a holdback which creates a reserve and also covers the financing charges. When you customer pays you or the factor you receive the remaining 10% of your invoice amount, less the financing charge.

In Canada cost of factoring ranges from 1-3% a month. It turns adversity into opportunity because you grow sales with larger gross and net margins, and if you utilize the financing properly you are actually in a position to reduce much, in some cases all of your financing costs by taking discounts with your own suppliers or buying smarter and in larger quantities. Reversing the cash flow for business problem – That’s a win win in the language of business.

Why and Asset Based Line of Credit Will Simplify Your Business Credit Needs for Cash Flow Finance

Are you on board or close to falling off the track? We’re of course talking about Canada’s newest entrant into business credit financing, commonly called an ‘asset based line of credit’.

Let’s talk about what this type of business financing is, why is it different from what you may have come to expect, and what are the benefits for your business when you consider this type of financing.

It is all about one word – ‘assets’ – if you have them, you qualify, if you don’t have them, well, lets not go there…

An asset based line of credit loan in fact is not a ‘loan’ per se, that’s where we spend a lot of time talking to clients about what this type of financing really is – because they view it as borrowing and adding debt to the balance sheet.

In reality the asset based financing we are talking about is simply a revolving line of credit that is tied very specifically to the value of your assets – the most common asset categories under this line of credit are inventory and receivables, the other assets that can be thrown into the mix are unencumbered equipment, tax credits, real estate, etc. And again, at the risk of over repeating, we are not talking about loans, we are talking mainly about borrowing on a daily basis, as you need it, and using these assets as collateral.

We have seen countless examples of how this type of Canadian business financing has increased a company’s borrowing ability by 100-200% or more. How can that possibly be, ask clients. It is simply because the borrowing you are used to, if you have been able to achieve it, is based on rations and covenants and credit limits, and your ability to achieve forecasts for institutions such as the Chartered banks. When you aren’t able to achieve that we will call traditional cash flow financing in Canada via a business line of credit the asset based facility is a solid solution.

Clients invariably ask ‘ How do we get approved – do we qualify?’ – We have already talked about your qualifications- got assets? You’re approved. That’s a simplistic answer, so let’s explain in more detail. Typically in Canada these types of financings work best for facilities in the 250k+ range. Facilities smaller than that tend to be receivable based financings only. In general the asset based lender prefers a higher ratio of receivables to inventory, but that is not always the case, depending on your industry and your asset categories.

Most Canadian business owners and financial mangers know the general cost of bank financing – asset based financing is more expensive, but offers you unlimited liquidity without the shackles of ratios, covenants, outside collateral, emphasis on personal guarantees. Many of the largest corporations in Canada use this type of financing, but it also covers what we call ‘ story credits ‘. These are cases where your firm is in a turnaround, perhaps it has new contracts, perhaps you are coming off a less than satisfactory year, etc. There are a multitude of reasons for choosing this type of financing.

So if cash flow finance is your challenge and asset based line of credit is your solution. Speak to a trusted, credible and experience Canadian business financing advisor who can demonstrate to you the benefits of this innovative form of a new breed of cash flow finance for your ongoing growth needs.

Your Competitors Use SRED Financing to Cash Flow CRA SRED (SR and Ed) Tax Credit Claims

Your business success hasn’t been based on doing what your competition does, but if they are utilizing SRED financing to grow their business doesn’t it make sense to investigate why cra SRED claims, when financed, might put you a step ahead of the competition?

We think so, and if the Scientific Research and Experiment Development Program, (aka ” SR& ed ) pours billions of dollars into Canadian company coffers every year why wouldn’t you want to accelerate the access to cash for those claims and maintain your own competitive posture in your industry.

The financing of you SRED claim, via what we could call a SRED bridge loan is a recognized and solid manner in which to recover working capital faster. The very essence of having a SRED claim filed of course means you will recover your funds, but doesn’t it make sense to recover them sooner, putting cash flow and working capital back to work for your company.

In business it’s all about timing, and in case you haven’t noticed things aren’t exactly moving slower in Canadian business today. So is it an advantage to get immediate cash for your SRED claim instead of waiting several months, in some cases up to 9 or 12 months for your funds? You probably don’t need exactly cash flow these days – therefore we strongly recommend waiting for your cheque from the feds, it’s ‘ in the mail ‘ so to speak. However, if you’re among the many clients that we meet that could actually use additional cash flow today, then you should be considering financing your claim.

What are the mechanics of having your claim financed, ask client such as yourselves? To say that SR&ED financing is a niche industry requiring knowledge and expertise is a bit of an understatement. That is why we strongly suggest you work with a trusted, credible and experience d business financing advisor who will walk you through a very basic process.

SRED financing will, 9 times out of ten, get you approximately 70% of your total SR&ED filing as a cash flow bridge loan. Why 70%. It is simply because the remaining 30%, which of course still belongs to you, is held back as a buffer to cover both any adjustments the good folks in Ottawa might make to your claim, and it also helps to cover off the actual financing charges. However, it’s easy to see that if you have a claim, for example, of 300k that an immediate cash flow loan of 70% of that amount generates some real cash back into your firm. Which of course, per the program, is in effect a non repayable grant.

Could the benefits therefore be any clearer – The Canadian government is reimbursing you with your R&D funds and you are accelerating that reimbursement straight back into working capital. Use the funds for whatever general corporate purpose – pay payables, buy new equipment, re invest in more R&D, it’s your call!

The mechanics of SRED finance are simple – have a claim prepared by a credible consultant or accounting firm. Complete a simple business financing application, go through standard due diligence as you would any type of financing, and execute a financing document which in effect collateralizes the SRED for your SR&Ed loan. The entire process can be completed with a couple of weeks with the right amount of commitment on your part.

If your SRED claim was prepared by a consultant who did it on contingency you can even pay them out of the financing – at that point everyone is happy!

Your competition probably finances their CRA SRED claim – why not increase your own cash flow and maximize your refund for the best uses your company can utilize. That’s a competitive financing strategy that works!

Here’s 5 Immediate Solutions for Working Capital Financing for Your Cash Flow Business Needs!

These days you probably would be happy with 1 solid working capital financing solution for your cash flow business needs.

We’ll beat that and give you 5! How is that for alternative solutions to your working capital and cash flow needs?

Funding of working capital continues to be a large challenge for Canadian businesses of all size – you want to grow your business which requires investment in and of it, and by the way those suppliers and employees want to be paid on time also.

Lets examine some solid real world solutions to your cash flow needs – in some cases all of them could work for you, but in general even a couple of these solutions would ‘ fix ‘ the current problems you face on a day to day basis.

The most liquid asset any business always has, (next to cash) is your receivables. Working capital financing is best generated by the collection, or financing of your receivables. This can be done via either faster collections, or selling your receivables as you generate them. This financing is called receivable discounting or factoring, and is becoming increasing popular everyday.

Did you ever think of the government of Canada as one of your best working capital financing partners? Our clients are amazed when we suggest that ‘ partner’ as a solution. But the specialized government program, technically called the BIL/CSBF loan program finances any equipment and leasehold improvements you need via a greatly subsidized loan program. We say subsidized, because even if you are a start up rates are great, guarantees are limited, and loan max amount is up to 350,000.00. Our clients who take advantage of this program consider it, bar none, the best financing in Canada for small and medium business, including start ups.

You’ve spent your working capital – would you like to get it back? Clients always ask what we mean by that. Any equipment you have already paid for can often be refinanced, the technical term is sale leaseback, and we find that either that strategy or a short term bridge loan with the equipment as security is exactly what our clients need to bridge the cash flow gap.

We spoke above about receivable financing – one of the best facilities for Canadian business is a combo working capital facility that finances, or ‘ margins ‘ both your A/R and your inventory. Since many firms previously couldn’t finance their inventory either elsewhere, or via banks, the combined liquidity of borrowing against your A/R and inventory is a true power punch! Typical this type of financing is known as an asset based lending facility, and makes most sense when the facility is at lease in the 250k range, and sky is the limit after that.

Many clients are totally unaware the Purchase orders financing is available in Canada. This is a strong potential cash flow saver, and generator, since your suppliers are paid for product when you order it, once you have received the P O. The P O lender takes the inventory and receivable as security, but in effect finances your whole sale. While it is an expensive form of financing if you have good gross margins and could otherwise not facilitate the sale of your large new orders and contracts it’s a perfect solution.

In summary, make yourself aware of your Canadian business financing options. Working capital and cash flow are available if you have assets and orders. We have demonstrated that clearly to you via 5 separate solutions. Speak to a trusted, credible and experienced Canadian business financing advisor to determine what works for your firm.