What is Accounts Receivable Factoring?

Who Should Use AR Financing Services?

Your customers take 30, 60, even 90-days to pay … but you need the money now. Payroll and government remittances are all due. Your suppliers are calling. Rather than waiting for your customers to pay you, an accounts receivable factoring company in Canada can advance you the money today and they will wait the 30, 60, 90-days days for your customer to pay.

How It Works?

When you bill your customers, accounts receivable factoring companies will pay you a healthy portion of the invoice immediately – usually 75-85%. You generally pay fees to The Factor interest from the date you get the financing to the date that The Factor receives payment from your customers. However, it is not a fee that you pay directly. The Factor takes the agreed upon fee out of the 15-25% holdback, or “reserve”, that was short-paid when they initially advanced the 75-85%.
This type of financing is typically suited to start up or early-stage businesses, those experiencing rapid growth, those companies hitting a bump in the road, or those in distress. Or, it may be as simple as traditional bank financing is either not available, or is not the type of financing that the business owner is comfortable with at that particular time.

More Flexibility With Us

Historically, accounts receivable factoring was done on a notification basis … i.e. The Factor would contact your customers to notify them payment of the invoice needed to be remitted to them, not you.  Some business owners with very large customers prefer not to involve those customers in this process so notification became an impediment to a factoring solution. In response, some factors now offer non-notification basis factor solutions where you continue to receive the payments directly from your customers but the payments are deposited in a restricted bank account. However, not all businesses qualify for this option as it requires a more complex set up and is more risky for the factor as they do not control the receipt of funds.
Even though accounts receivable factoring rates may vary; anywhere from 1.25% to 3% per month, and the factors will require a lien or charge over the invoices they finance, there are still many reasons to choose factor financing:

  • Customer credit checks and collection – Factors can perform credit checks and manage the collection of payments from customers so you don’t have to. This can save you time and money and offset some of the interest costs.
  • Same or next day financing – Providing you with immediate access to cash. Banks may take weeks or months to approve business financing.
  • More customized service levels – Factor solutions typically have less red tape so factors are generally more responsive and quicker in getting things done.
  • Stable source of financing – Factors tend to work with you through the ups and downs whereas traditional lenders tend to want to curtail lending when things are not going well.
  • Quick approvals – Factor companies can typically give a very quick “Yes” or “No.”
  • Other financing options – Some factors can provide additional financing (beyond factoring customer invoices) secured by other assets such as purchase orders, equipment, real estate and inventory.

While banks do not typically offer this type of solution, there are a wide range of accounts receivable factoring companies in Canada and their terms, conditions and service levels can vary significantly.

Want to know more?