How to Use Receivables Factoring to Improve Your Cash Flow

Losing a sale because you could not afford to service the client and wait for payment is probably one of the most frustrating things that can happen to a business owner. Unfortunately, this very thing happens to business owners across Canada every day. They have the sales expertise and the business acumen to grow their companies, but they lack the cash flow to complete the sale and grow.

A common problem

Most commercial sales in Canada are done using trade credit, in which the vendor has to offer the client 30 to 60 days to pay an invoice. This practice is quite common when dealing with large companies. Many small companies can’t afford to wait up to two months to get paid. They have business expenses that must be paid and need the liquidity to cover them. This dilemma results in difficult choices: the business owner can choose to make the sale, but risk cash flow problems due to slow payments, or they can walk away from the sale and lose the customer.

Both options are bad. Making the sale and getting into cash flow problems can be as bad – or worse – than losing the sale. If not handled correctly, cash flow problems can grow – leaving your company without money in the bank and putting you out of business.

What if all your clients paid cash on delivery?

Imagine if all your clients paid using cash on delivery. Would you have cash flow problems? Probably not. Your working capital would be strong and you’d be able to cover your operational expenses. However, convincing large corporate clients to pay cash on delivery is next to impossible. They demand payment terms as part of their contract clauses. That is how they work.

One way to mitigate this problem is to offer a discount as an incentive for a quick payment. Small companies frequently use this tactic, as it can often improve your working capital. Results, however, are not predictable since clients get to choose when and if they pay quickly.

There is a better way to improve your cash flow, and it does not require your clients to pay sooner.

Factor your receivables

Receivables factoring is a financial tool that has been gaining popularity in recent years as a way to solve this specific cash flow problem. Factoring provides a financial advance using your slow-paying receivables as collateral. This advance payment can accelerate the majority of your revenues that are tied to slow-paying invoices and provide the liquidity you need to manage your business.

You can use factoring to offer term credit to clients because you can always finance an invoice if you need funds. This strategy unlocks your potential to grow.

How does factoring work?

The transaction is relatively simple. You work with an invoice financing company that advances funds on your qualified invoices. The advance usually averages 80% of outstanding accounts receivable. This advance is provided as soon as you deliver the work/product to your client and submit an invoice to them.

The transaction concludes once your customer pays. At this point, you receive the remaining 20%, less funding costs. For more information about transactions, read “What is Accounts Receivable Factoring?

Two important advantages

The most important advantage of accounts receivable factoring is that you have more working capital to operate the business. Factoring allows you to take on new business since the line is designed to support growing sales. The line also increase as your sales grow, provided the sales meet the funding criteria.

Getting this type of financing is also relatively easy. The main requirement is that your clients have good commercial credit. This requirement highlights an important difference between factoring and conventional financing, as you don’t usually need additional hard assets to secure the funding (however, this requirement can vary).

This advantage makes factoring a great alternative for growing companies that have cash flow problems, but also have big opportunities.

Why use us?

Commercial Capital LLC (Canada) is a leading provider of factoring in Canada. We can provide financing to companies in most provinces quickly. You can get an online quote by filling out this form.

We strongly believe that our customers should be able to make an informed decision about their finances. As a result, we have one of the most comprehensive sites about factoring in Canada. And if any of your questions are not answered on this website, call us toll-free at (877) 300 3258 at any time.