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WHAT IS FACTORING ?
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Factoring is the financing of commercial accounts receivable on a regular basis or only as needed. There is no fixed limit to the financing available, if there is an increase in receivables, the factoring limit will follow. Therefore the funds generated improve the cash flow of the business. All the accounts can be factored or only a portion.
It is a valuable tool for growing companies or start-ups. There are several kinds of factoring available in Canada; with recourse, without recourse, at a discount, with a credit line, spot factoring, cheques discounting, with accounts management, without accounts management and with an inventory loan.Here are some of the most frequently asked questions and the answers. We hope these will answer your questions. If not, do not hesitate to contact us for more informations.
When is the best time to use factoring ?
Answer : Most businesses may use factoring at any time. At the start-up stage factoring the accounts will generate additional funds badly needed due to insufficient cash flow or inadequate bank financing. During the growth of sales, it is imperative to have funds available and the factoring company will become an invaluable ally to generate more cash, protect the business of bad debts and manage the increasing administration volume. Many clients are still factoring after the growth period because of the convenience of the complete administrative and financial services.
Is factoring improving my business ?
Answer : For the vast majority of companies, factoring will be very useful when it is well utilized. You can increase your sales, get more inventory or buy additional raw materials with the funds generated by factoring your accounts. Besides the savings in administrative cost, you can also benefit from early payment discounts from your suppliers (usually 2% net 10). In reality, the factoring company becomes your business partner, a very efficient partner.
Do I factor all my accounts receivable ?
Answer : Not necessarily. If your cash flow needs are met by the funding of a few accounts, you are able to do so and you can also delay the disbursement of your funds at the time of your choice. Please note that this flexibility is not available from all the factoring companies.
Do I factor all my invoices for a customer ?
Answer : Depending on the factoring company, you may have to submit all your invoices for factoring. However, some of them allow you to finance only a few invoices for a specific customer. Certain factors also provide an insurance of your accounts and this will imply having credit limits imposed on your clients. You have to request an approval for your new customers and when they are approved, they are covered by the insurance.
Is my business too small ?
Answer :The factoring companies usually offer financing based on the monthly volume of accounts receivable. Therefore the minimum volume required will vary from one factor to another. It is possible to find factoring for your accounts with a monthly sales volume to finance as low as $10,000.
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Are the foreign accounts receivable accepted ?
Answer : Yes, the invoices for customers in the United States or other foreign countries are eligible for financing with most factoring companies.
Are my customers getting a bad impression from this ?
Answer : To the contrary, factoring is widely used around the world by businesses experiencing strong growth and in need of adequate financing during that period. It is a good management decision and Canada has many efficient and professional factoring companies. Financing the accounts receivable that way is very useful to prevent bad debts, slow paying customers and provide the cash flow badly needed.
Are my customers harassed for payment ?
Answer : Not at all, you continue your business relationship with your clients as usual for all the sales activities, ordering, invoicing, pricing, discounts, quantities, scheduling shipping, etc... The management and the collection of your accounts once invoiced is done by the factoring company in your name and you are constantly informed of any problems or discrepancies arising from the communications with the customers. The reports provided to you every month enable you to monitor all the work done previously on your behalf.
What is the real cost of factoring ?
Answer : There are many ways to factor the accounts receivable. The most common two are involving a management fee plus a loan interest or simply a discount fee. There may also be a file fee required by some factoring companies. The first type includes a fixed account management fee usually at 2% plus a loan with an interest rate of prime plus 2 to 5 points depending on the risk involved and all the accounts receivable are managed by the factor. The second type, the discount fee, is a fixed rate applied to
each invoice factored and is based on the number of days between the disbursement by the factoring company and the reception of the payment made by the customer. Also involved in the calculation of the discount rate is the monthly volume of invoices submitted for factoring. With this type of factoring, you have the latitude to offer only the accounts you want to finance. The discount rate usually varies from 2 to 6% depending on the volume of invoices factored. Please note that there may be a time period involved with a factoring contract varying from 6 months to two years depending on the factoring company you choose to use.
What are the securities required by the factor ?
Answer : The securities usually requested are a first priority interest on the accounts receivable, a factoring contract and a personal guarantee from the owners of the company. Factoring may also be used in conjunction with a credit line at the bank. On this occasion, only a portion of the accounts receivable will be offered as a first priority security to the factoring company. This factoring process is not available from all the factors.
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