What is Invoice Factoring?

Factoring is a form of financing that has been gaining popularity in Canada as a way to finance a company with cash flow problems. This article helps you understand invoice factoring better and determine if it is the right solution your company.

What problem does factoring solve?

Most corporate sales, especially those to large customers, require that you offer payment terms. Basically, your customer demands the option to pay invoices in 30 to 60 days for a very simple reason: by paying you slowly, they improve their cash flow.

As a small business, you usually have limited options. You can offer terms and make the sale – or decline to offer terms and lose the customer. Both alternatives are unacceptable if your company has limited cash reserves and cannot afford to wait up to eight weeks for payment.

How does factoring help you?

Factoring provides you with an immediate infusion of working capital using your slow-paying invoices as collateral. It improves your cash flow and minimizes the problems associated with slow-paying clients. A properly used factoring facility can provide many of the benefits of having quick-paying customers without requiring your customers to pay any sooner.

How does factoring work ?

Most factoring transactions finance your invoices in two instalments: the advance and the rebate. The advance covers about 80% of your receivables and is wired to your account as soon as you invoice your client for completed work. The rebate covers the remaining 20% and is wired as soon as your customer pays the invoice in full, on their regular schedule. The funding fee is often deducted from the rebate and can range from 1.5% to 3.5% per 30 days.

Customer contact: Notice of Assignment and verifications

Prior to financing invoices for a specific customer, the factor must send them a Notice of Assignment. This document informs the client of the financing relationship and provides them with the new remittance address. This document is usually sent only at the beginning of the relationship.

Most invoices submitted for financing are verified prior to funding. This common process among factors ensures that clients receive the goods/services as invoiced and that they have no complaints. The verification process can be done by email, fax, or phone, based on circumstances.

Can you factor old invoices or troubled clients?

There is a common misconception that factoring can be used to finance old invoices and receivables with collections problems. Most of these invoices, however, would not pass the verification process and would be rejected for funding. Even if they did pass, financing troubled invoices can backfire because of how financing transactions are set up.

What are the advantages of factoring?

Factoring has a number of advantages. The most important advantage is that factoring improves your cash flow and provides a solid financial base for growth. Your financing line can easily grow with your revenues and can support expansion. In most instances, line increases can be approved quickly and do not require that you repeat the underwriting process.

Are there any disadvantages?

Like any solution, factoring has some disadvantages, including:

  • It solves only one specific problem
  • It’s more expensive than other solutions
  • It requires customer contact

However, many companies find that the benefits far outweigh the disadvantages.

How do I qualify?

Qualifying for factoring is easier than qualifying for other business financing programs. Your company should meet these requirements:

  1. Have creditworthy commercial clients
  2. Have A/R that is free of encumbrances (a PPSA search is done)
  3. Not have serious tax/legal issues
  4. Be managed by individuals with business experience

Get more information

Are you looking for a factoring quote? We are a leading Canadian factoring company and can provide you with high advances at low rates. For more information, get an online quote or call us toll-free at (877) 300 3258.