Many companies in Canada run into a common financial problem. They sell products or services to larger companies, who insist on getting payment terms. They want the option to pay an invoice 30 to 60 days after you have delivered your product or service. This is a regular business custom and most commercial sales are done this way.
Unfortunately, few small business owners plan for this. And this gets them in financial trouble.
A simple problem
The problem is fairly simple, but very challenging to fix. You have a steady stream of expenses that you need to pay on a regular basis. You need to pay staff, suppliers, rent, utilities, and so on. But your clients pay slowly. In the short term, these numbers may not add up and lead to cash shortfalls. This is often affects small companies that don’t have any cash reserves or access to credit. Sure, your company would be cash flow positive if everyone paid quickly. But the problem is that customers pay slowly.
Where conventional financing fails
Trying to fix this problem with conventional funding is very difficult. Most lending institutions are not comfortable lending to small businesses. Especially businesses with a limited track record, financial problems and few assets. While lending institutions may have products that help, most small companies won’t be able to qualify for them and be able to use them.
Solve the problem. Finance your invoices
One easy way to solve this problem is to finance your invoices. In Canada, factoring financing has been gaining popularity as a solution to these problems. It’s available to small companies that work with creditworthy commercial clients. Basically, a factoring company finances your invoices from slow paying clients. This improves your cash flow and provides the funding you need to cover your business expenses.
The transaction is often done in two payments, called the advance and the rebate. The advance is provided as soon as the work for the invoice is completed and covers about 80% of the receivable. The rebate is provided once your client pays, on their regular schedule. The rebate covers the remaining 20%. The financing fee is often deducted from the rebate.
A scalable solution
One important advantage of factoring your invoices is that it has scalability. This means that the line can increase as your sales to creditworthy clients grow. Usually, this does not require any major underwriting and can be done quickly. This allows you to grow your company by offering terms to your clients, without adding cash flow problems.
Most small companies should be able to qualify for this type of funding, provided that they:
- Sell to creditworthy commercial clients
- Invoice after goods / products have been delivered and accepted
- Has good invoicing practices
- Has no liens / encumbrances covering the receivables
- It’s owner and managed by experienced individuals