We get a lot of questions on factoring as a business finance solution in Canada. The concept, background, and mechanics of financing just your AR is somewhat misunderstood we think. Let’s share some basics for the sake and benefit of those firms considering this method of business financing.
1. Where is factoring at in Canada? First of all there seems to be a general consensus that this type of finance vehicle for your business is one of the faster growing and certainly feels like it is getting more popular everyday. The reality is that it’s been around for many, many years, and in the case of being around period it’s been around for hundreds of years in North America, Europe, etc… Kind of reminds us of that saying in the fashion industry, ‘ what’s old is new again …’!
As a potential user of A/R finance it kind of makes sense to know who you are working with. In Canada the market is somewhat smaller and fragmented, with firms offering AR finance being either small or mom in pop in nature, or to the other extreme subsidiaries of some very large U.S. and Global corporations. Talk about a choice!
It’s also important for you to distinguish between firms who offer this financing as a part of their overall solution, or if you’re dealing with a specialty firm, for all the right reasons! We’ve always preferred to work with an expert ourselves!
From our perspective it kind of feels that Factoring got a lot more popular after the 2008 recession. That’s not hard to disagree with because of the way the business credit totally dried up at that time, with thousands of small and medium size firms finding they have a lot less access to business credit. Canada’s chartered banks clearly no longer dominated all of Canadian business financing, that’s for sure.
2. What size and type of Companies utilize factoring? Here’s where it get’s interesting, and not doubt speaks to the fact of this new found popularity. Why? Small firms use factoring, start up firms use it, SME firms utilize it, and guess what…. some of the largest corporations in the world utilize AR receivable financing, although it takes a new name higher up the food chain, often referred to as a ‘ Securitization ‘. At the end of the day it’s all about taking A/R off the balance sheet immediately, replacing it with cash, and taking on a finance charge for that privilege of enhancing your balance sheet with cash.
3. When does Factoring work best? Several business situations arise that drive the popularity and success of this finance solution. Primary is the inability of the borrower, small or large, to get traditional bank type financing.
But we remind clients also that even start ups qualify for receivable financing, and many firms that are actually doing quite well ( too well in fact because they are growing too fast ) also embrace this finance , cash flow and working capital solution. It’s also a great way to assist in the restructuring of a company that is having any one of a number of business challenges that preclude it from accessing working capital elsewhere.
Is that everything you need to know about AR Receivable financing in Canada? Probably not, but it’s not a bad start and business owners and financials managers should speak to a trusted, credible and experienced Canadian business financing advisor for more info and assistance on this widely misunderstood finance solution .