how much is it? No, we’re not standing in line at a department store, but we’re sitting with our clients who are always asking what the true cost of factoring accounts receivable is and whether an accounts receivable financing facility is their solution to their working capital problems. real method. They also ask other questions like how does the facility work and what is the best type of facility for the Canadian business market, so we will cover those as well.
Although the popularity of accounts receivable financing is growing every day, we don’t think there is more misunderstood business financing in Canada. The biggest stigma surrounding this topic is actually true costs, and we use the term true costs because many Canadian business owners and financial managers simply do not understand what constitutes true costs and, more importantly, how to significantly offset and reduce them.
We would point out that behind the real cost fast and furious is the question of how the facility works and what type of facility is best in Canada – because there are many types.
To get our questions right, let’s quickly define our topic – factoring (also known as receivables discounting and invoice financing) is simply the sale of your receivables to a third-party company that provides you Instant (and we mean same day!) cash financing for your business
One of the client misconceptions about pricing is that in an accounts receivable financing scenario, you receive (depending on who you deal with) 80-90% of the invoice amount. This must be taken into account when you look at your total factoring costs.
One of the things that keeps bugging us is the cumbersome terminology that many element companies use when pricing your facility. That’s why it makes total sense to speak to a trusted, reliable and experienced Canadian business finance advisor who will work with you to navigate the (industry created) maze of factoring, factoring costs and day-to-day documentation processes.
You can quickly and easily focus on the true cost of factoring by simply keeping in mind three things you need to know – they are:
1. The percentage you prepay on the invoice (see our previous review)
2. Advance discount rate
3. The length of time you typically collect your receivables
Most business owners don’t readily accept their DSO, their “Day Sales Performance.” You have to because this is an ongoing measure of how long it takes to collect your receivables in days. It’s calculated simply by taking the accounts receivable on an annual basis, multiplying them by 365 (days), and dividing that number by the sales for that time period.
So if you know your collection period and get an honest, clear answer on our three points, you can easily determine factoring costs.
Let’s take a clear example: Your factoring company prepays you 80% of your invoice. Their discount rate is 3%. So, if you’re a lender, your annual return to your customer (that’s you!) is simply: discount rate % times 365 days divided by days invoices outstanding.
In Canada, this rate will typically range from 1.5-3% per month, depending on the lender’s view of the size and quality of your receivables portfolio.
Is that expensive financing? You tell us because if you take into account that the receivables financing facility gives you unlimited cash flow to generate sales and profits and you can use that cash to offset financing costs, well…we don’t think so. Costs can be offset by using funds to obtain supplier payment discounts, and purchases in larger quantities and at better prices based on your inventory needs.
Talk to a trusted, reliable business finance advisor we’ve talked to, and he or she will guide you through the maze of receivables discounting and get you to the right financing at a price that makes sense to you.