Ontario is a hub for small business creation across Canada. It has a heavy concentration of companies in technology, transportation and manufacturing, among other industries, which often handle commercial sales. That it, they sell products and services to other businesses. While commercial sales have many advantages, they can also have challenges – if the company is not well financed.
One common challenge is that commercial sales are often done on credit terms. This means that the buyer has 30 to 90 days to pay an invoice. Buying on credit terms is a common business practice and companies have to offer credit as a way to stay competitive. The problem is that many small companies cannot afford to offer credit. They need quick payments so that they can cover their operating expenses. Often, offering terms without having the proper financial backing leads to cash flow problems. And if left alone, these problems can derail any growth efforts.
The problem with bank financing
Most of these cash flow problems could easily be fixed with a line of credit. The problem is that qualifying for a line of credit is very difficult. Most institutions are not very comfortable lending money to small companies with minimal collateral, shaky financial statements or a limited growth track record. Some companies that are near Toronto or Ottawa (Silicon Valley North) may have more options, but generally, options will be limited to certain industries. Most small companies will not be able to get a line of credit – at least not in their startup years.
Finance your invoices
Fortunately, you don’t need a business loan or line of credit to fix the cash flow problem created by slow paying receivables. You can solve it easily by financing your invoices. Basically, you can partner with a factoring company who will finance your slow paying invoices from credit worthy companies. This provides you with the funds to operate your business without having to worry about delayed payments. Also, it enables you to sell products and services on credit terms – because you can always finance an invoice if you need funds.
Simple transaction model
In Ontario, factoring transactions are often structured as a the financing of a receivable in two installments. The first installment usually covers 80% of the receivable and is advanced as soon as the work or product is delivered and accepted by your client. The remaining 20% is rebated once your client pays in full. A fee is usually subtracted from the rebate.
Advantages and qualification
When used correctly, a factoring plan can improve your working capital by accelerating the revenues that are locked in slow paying invoices. An important advantage of invoice financing is that it can scale easily as your business grows. This is an important advantage because most conventional business financing products don’t scale easily – business loans and lines of credit usually need to go through substantial underwriting before being increased.
Qualifying for this type of funding is comparatively easy. It’s important that you do business with credit worthy companies, because their invoices are the collateral that backs your financial transaction. Also, your company must:
- Have good invoicing practices
- Invoice only after work or product has been delivered
- Have receivables that are clear of liens
- Be managed and operated by competent individuals
Most small businesses, especially those with quality clients, will qualify for this type of funding. This makes it an ideal option for growing companies in Ontario that have working capital problems due to slow paying clients.