There is nothing more frustrating to a business owner that having to turn away sales because they lack the cash flow to support them. For companies that sell products, this means not being able to replenish inventory in time to capitalize new opportunities. For companies in the service industry, this means not being able to pay the additional employees (or hours) to cover additional service requests. This problem is fairly common, especially for small and midsized Canadian businesses.

There are many things that can cause cash flow problems. The most common problem is a simple one: timing. The timing of the revenues does not match the timing of expenses. For many companies, expenses come before revenues. For example, a product supplier buys inventory (an expense), sells it on net 30 terms and then collects revenues 30 days later. Likewise, a staffing agency can place employees, who must be paid weekly but then bills the client on net 30 terms. Again, they wait 30 days before being able to collect the revenue. Unless the company has a capital reserve to operate the company and grow while waiting to be paid, it will run into problems.

The solution to this problem is fairly simple. The right business financing solution can fix it. The problem is that getting a business loan can be very difficult for small companies. They require substantial documentation and collateral. And many times, they can take a long time to close as the institutions credit committees review the cases. There is an alternative solution that can work better than a small business loan – especially if your challenge is that you cannot wait 30 to 60 days to get paid by clients. It’s called factoring financing.

Factoring is a very different than conventional business loans. With factoring, you get an advance for your outstanding invoices. This is the equivalent of a quick pay. This helps correct the timing problem between expenses and revenues and provides your business with the cash flow to support existing operations and new sales.

Most factoring companies don’t lend money, rather they buy the financial rights to your invoices. Their most important consideration is your clients’ ability to pay the invoice in a timely fashion. This makes invoice factoring accessible to companies who don’t have substantial assets but do have great clients. However, the credit quality of your invoices is not the only qualifying consideration of a factoring company. Your business must also be free of judgments, lawsuits and liens.

Factoring transactions tend to be structured as a sale with two installment payments. The first installment is usually 80% of the invoice value and is given to you as soon as the invoice is sold to the Canadian factoring company. The second installment, usually 20% less the financing fee, is given as soon as your client pays for the invoice.

Small business factoring integrates quickly into most organizations and it has a very specific scope: it is designed to solve the cash flow constrains generated the timing discrepancy between expenses and revenues.

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Information about invoice discounting in British Columbia.

Most Canadian companies are able to finance operations and growth by using their own funds or by having the owners make additional capital contributions. Some companies do this by choice – they dislike the idea of getting business financing. Most companies, though, do so because they have no other choice. They just cannot obtain conventional business financing.

Many companies that run into cash flow problems do so because there is a timing gap between expenses and revenues. Usually expenses are immediate, but revenues are delayed for 30 to 60 days. Revenues are usually delayed because of the common practice of offering net 30 payment terms to clients. This timing gap can affect the availability of funds for other projects or worse, may force the company to delay certain critical payments.

One possible solution is to use a business loan (or line of credit) and use it to cover expenses when available funds are low. However, business loans are usually hard to obtain and can have inflexible limits. Furthermore, the loan application process can require that you provide the institution with substantial documentation and can take a long time to close. Many times, a better solution is to use receivables factoring to accelerate your revenues.

Factoring accelerates your revenues by providing your company with an advance for your net 30/60 invoices. This provides the necessary funds to cover operating expenses. The accelerated cash flow strengthens your company’s financial position enabling you to capitalize on new opportunities.

Qualifying for accounts receivable factoring is relatively easy since the main collateral are your invoices, which are backed by the reputation of your clients. It’s also more flexible than other forms of financing since it’s dynamic and moves in parallel with your billings. This enables your financing to grow, as your company grows. Accounts receivable factoring is an ideal solution for companies in the staffing , services, manufacturing and transportation industries.

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Learn about factoring in Alberta.

Finding the right business financing solution for a Canadian company can be a major challenge, even for seasoned professionals. Each financing solution has benefits and drawbacks and knowing which solution to deploy is critical. Deploying the wrong solution can have long term negative consequences for your company, dragging down growth.

One specific challenge stems from selling products and services to other companies on net 30 terms. This can be a problem because most companies incur a number of expenses before delivering their product or services. Waiting an additional 30 to 60 days to get paid increases the gap between spending funds and receiving revenue. This forces the company to dip into reserves to pay for operations. There is no problem with this strategy as long as the company has sufficient reserves. However, the company can get into problems very quickly if the reserves are exhausted. Interestingly, this can happen from a seemingly positive event, such as winning a large sale or project.

There is a specific business financing solution for this type of problem. It’s called accounts receivable factoring and it works by providing your company with a quick payment on your net 30 to net 60 invoices. The quick payment reduces, or eliminates, the gap between expenses and revenues. This puts your company on a solid financial footing, providing a platform for sales growth.

Qualifying for receivables factoring is usually easier than qualifying for a small business loan. Most factoring companies are more interested in the quality of your receivables than anything else since that is the collateral that secures their transaction. Thanks to this approach, small and medium sized companies with few assets other than a strong list of clients can usually qualify.

Accounts receivable factoring integrates fairly easily into most companies and works as follows. Once your company completes the work, you send a copy of the invoice to the factoring company. The factoring company gives you the first advance on the invoice which is about 80% of the face value. Once your client actually pays the invoice, the factoring company remits the second advance, which is the remaining 20% less the financing fee.

This type of financing lends itself well to certain industries. For example, staffing, security and transportation companies commonly factor receivables as a way to ensure they have funds to meet operational expenses.

Invoice factoring has been gaining popularity as an alternative to conventional business loans, especially for startup, growing and distressed companies.

Managing your company’s cash flow can be a tedious but critical task. If you operate your business like most other managers, you probably pay your supplier invoices in about 30 days. Likewise, your clients probably pay your invoices in about 30 days as well. The problem, of course, is that this process seldom works like clockwork. Inevitably, this leads to cash flow problems.

Experts recommend that company’s keep enough funds to cover about 5 months worth of operating expenses . This works very well in theory, but is almost never done in practice. Few small and midsized companies have the resources to keep such a large cushion of funds at the bank. Many companies, especially small businesses, operate at the edge and have less than 4 weeks worth of operating expenses set up as a reserve. This can create a critical situation should cash flow problems arise.

One way to solve this problem is to get business financing and use it to use it as a reserve. Getting a business loan can be a major challenge for small companies who lack the assets to qualify. Most conventional business loans require a rigorous due diligence and can take months to close. However, if the company has cash flow problems, a better solution could be to use accounts receivable factoring.

Accounts receivable factoring allows you to convert a large portion of your accounts receivable into cash very quickly. This provides the funds you need to pay suppliers and smooths out your cash flow by accelerating receipt of funds. Factoring works by having an intermediary factoring company advance funds against your invoices while they wait to get paid by your client.

One advantage of working with Canadian factoring companies is that they focus mainly on the credit quality of the receivables they finance. They consider accounts receivable to be the most important collateral. This makes accounts receivable factoring and accessible solution to many small and mid sized companies in Canada.

Accounts receivable factoring is an ideal solution for Canadian companies whose biggest challenge is that they cannot afford for their clients to pay their invoices.
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Information about factoring in Manitoba.

Most companies that have weathered the recession have been left in a shaky financial position – where that can’t completely capitalize the current economic recovery. For many companies, cash flow has degraded to the point where they are living from client payment to client payment. For example, most commercial invoices used to get paid in 30 days. Now it usually takes 45 to 65 days to get paid. Sometimes even longer.

Although payments seem to take longer to come by, expenses seem to pile on very quickly. You have suppliers to pay. Payroll. Utilities. Office expenses. And the list goes on. This creates a serious gap in your company’s cash flow. And this gap can prevent your company from growing once the economy improves and sales start increasing.

One way to fix this problem is to ask clients to pay their invoices faster. However, this seldom works as most clients are paying slowly because they have problems of their own. The alternative solution is to get business financing. Few companies are able to obtain business loans in the current environment though. Institutions are only lending money to companies that have impeccable financial statements, substantial assets, years of experience and well seasoned management. And even if you meet this criteria, qualifying for a business loan is far from certain.

A third approach is to fix the cash flow problem using accounts receivable factoring. This solution reduces the cash flow gap by financing your invoices, and therefore reducing the amount of time it takes you to receive payments. The transaction uses a third party financing company referred to as a factoring company.

The transaction mechanics are fairly simple. Once you have an invoice from a credit qualified client, you sell it to the  Canadian factoring company, which pays you for it in a few days. The factoring company will buy your accounts receivable in two payments. The first payment is usually for 80% of the invoice. You get the remaining 20%, less a factoring fee, once your client pays the invoice in full.

Qualifying for accounts receivable factoring is easier than qualifying for conventional business financing. The most important requirement is that your clients need to have solid commercial credit.
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Information about factoring in Ontario.