Getting conventional business financing in Canada can be little difficult. To qualify for bank financing, most businesses (and their owners) need to be able to show substantial assets, a long profitable track record and must be able to post collateral that is acceptable to the institution. The problem is that few small businesses can actually qualify for this type of funding.
However, companies that sell to commercial customers and have cash flow problems may qualify for an alternative form of financing that is called invoice factoring. Most small businesses that sell to commercial customers have to extend 30 to 60 day payment terms to their customers. However, few of these small businesses can afford to wait for payment - they need the funds to cover operational expenses. And unless they can cover the expenses from their cash reserves, they will only have three options – delay expenses, ask customers for a quick payment or get business financing to bridge the gap.
Most business owners will try to juggle expenses and invoices hoping to manage the situation. Sometimes this will work, but many times it won’t. For many, the better solution is to use factoring. In Canada, factoring programs have been gaining popularity in recent years as a flexible solution for small business owners. Factoring offers a simple solution – an intermediary called a factoring company gives you an upfront advance for your invoice. They hold the invoice until payment, while you get the liquidity you need to run your business. The transaction is settled once your customer pays the invoice in full.
One of the advantages of factoring is it’s availability to small businesses. Since factoring companies buy your invoices, the biggest requirement to qualify is that your customers (who pay your invoices) should have solid commercial credit. Aside from this, your company should be free of legal and tax problems.
It’s transaction structure and ease of availability make accounts receivable factoring and ideal solution for small businesses whose biggest problem is that they can’t wait up to 6 weeks to get paid by customers.
