The premise is simple. A company sells a product or service to a commercial or governmental customer. It offers payment terms of up to 60 days which allows the customer to take up to two months to pay the invoice. Few customers can afford to do this, but they have to if they wish to keep their customers. Factoring helps by providing an advance on the slow paying invoices. This provides the company with working capital that enables it to cover its business expenses. Perhaps more importantly, it also provides a stable financial platform that allows it to take on new customers and offer payment terms with confidence.

Basically, a factoring company advances funds to your company and uses your invoices as collateral. The factoring company also settles transactions as your customers pay on their regular schedule. This last point is very important. Your customers are not required to pay sooner – they pay on their regular schedule.

Factoring is ideally suited for:

• Trucking companies
• Freight brokerages
• Staffing companies
• Consulting companies
• Oilfield service companies

Qualifying for factoring is usually easier than qualifying for other types of business financing. Since the factoring company is financing your invoices, it is very important that your customers have very good commercial credit quality. Additionally, your company must not have any major legal or tax problems. This low barrier of entry makes accounts receivable factoring an option for small companies that can’t obtain conventional business financing. Because of this, factoring in Canada is a growing financial alternative for companies in the province of Québec that have working capital issues because of slow paying clients.

The transportation industry has a simple solution for this problem – it’s called a quick pay. Basically, a shipper agrees to pay their invoice quickly in exchange for a discount. This strategy actually works fairly well provided that you find shippers and freight brokers that are willing to pay quickly. However, not every customer will offer to pay quickly. And those that do offer to pay quickly, may not do so reliably. Which basically leaves you exactly where you started – staring at the possibility of cash flow problems. For many transportation companies the better solution is to use freight factoring.

What is freight factoring? It is a form of financing that accelerates the money that is tied to your slow paying invoices. It provides similar benefits to a quick pay without requiring your shippers and brokers to pay early. When used correctly, factoring your freight bills will provide you with the financial stability you need to run your business, but more importantly, to plan for future growth.

Factoring offers a simple proposition. A factoring company advances funds, using your invoices as collateral. The first advance usually covers up to 90% of your outstanding invoices and is provided as soon as the load is delivered. The second advance, covers the remaining 10% less any fees, and is provided once your customer pays in full. While it’s not exactly the same as a quick pay, this type of financial transaction offers similar benefits. Additionally, many factoring companies offer additional services such as fuel programs and credit reviews. These can help you lower costs and minimize bad debt.

Most freight bill factoring lines can be set up relatively quickly – taking anywhere from a couple days to a week to be deployed. Additionally, they are available to small to large trucking companies alike. This makes factoring your freight bills an attractive alternative for transportation companies that have growth opportunities but are facing challenges due to slow paying customers.

1. Factoring Advance: Is the amount that is paid upfront. It usually ranges between 70% and 85% of your invoice.
2. Factoring Rate:  It’s the cost of the transaction. It’s usually a percentage.
3. Factoring Rebate:  It’s the remaining 30% to 15% (less the factoring fee) which gets advanced to you once your customer pays the invoice in full.

In a simple factoring transaction, you get the advance immediately once the work is completed and invoiced for. The rebate, less the factoring fee, is provided once your customer pays in full. The transaction structure is very important because in order to get the lowest possible cost of funds, you need to have a combination of the lowest possible factoring rate and the highest possible factoring advance.

In our view, the most effective way to negotiate a lower cost of funds it is to outline all the details of the factoring transaction and then determine which components play a role. This will usually include the advance, the rate, the rebate, any reserves and ancillary fees. Once you have done this, you should make sure that you negotiate each and every point in order to ensure a favorable outcome. You should also note that this article only covers the factoring rate, the advance, and the rebate. Many factoring companies offer proposals that are more complex and have other variables that need to be negotiated.

Disclaimer: this article oversimplifies the very complex matter of negotiating the cost of business financing. It does not intend to replace the advice of a financial or legal professional if you require it. As a matter of fact, we encourage that you seek financial and legal advice from competent professionals that are familiar with your circumstances.

From a factoring company’s perspective, the rate that they charge is a reflection of the risk of not getting paid back. The higher the perceived risk of your business – the higher the rate. It’s a simple equation. Basically, if you want to get the most competitive factoring rates for your company, you  need to find a way to lower the factoring company’s perceived risk. For many, the best way to do this is to follow these steps:

1. Find a factoring company that is knowledgeable and established in your industry
2. Present a professional image of your company
3. Present a professional and complete factoring application

Let’s cover the first step. How do you determine if a factoring company is knowledgeable and established in your industry? The answer is simple – you call them and you ask. Most factoring companies will give you a good idea of the industries that they specialize in if you ask them. And this is very important because most factoring companies have certain industries that they specialize in. And because they have a good understanding of their industries, they can give the best rates.  It’s also good idea to ask them a couple of key questions about your industry, just to ensure they are as knowledgeable as they say. For example, if you’re in transportation, you should ask them about their freight bill and paperwork procedures, and which shippers and brokers there familiar with. Additionally, you may want to ask them to provide you with a few references that have been clients for more than one year.

The next step is to make sure that you present a professional image for your company. While this is subjective, it can have a great influence on the type of factoring proposal that you get. If the factoring company perceives your company to be professional, and therefore well run, it will usually assume that it has a lower risk of default. This usually translates into lower rates. Conversely,  if your company is presented in an unprofessional manner, you can expect that to be reflected in your proposal as well.

Most prospects don’t do a good job in step number three – presenting a professional and complete application. Most factoring companies are accustomed to getting applications that are very difficult to read, are missing important documents, or just plainly have inaccurate information. This will have a negative impact on your proposal. Actually, if you don’t do a good job in your application, you may be declined the proposal. Once you have selected the factoring companies that you want to apply with, your best course of action is to present a well-written and well documented application. Use careful handwriting, give honest answers, and make sure that you include everything that the factoring company is asking for. And if there is something that you can’t provide them, be sure to be upfront about it and mention it in the application.

This last point can create a problem for some prospects. Many companies look for factoring to solve their cash flow problems – and cash flow problems don’t look good in an application. So what do you do? We think the best strategy is to be honest and upfront about your problems. Factoring companies are used to working with companies in high-growth environments that have gotten themselves into cash flow problems. They will usually understand. Just be sure that you are upfront about this and present the problem honestly, alongside your proposed solution to remedy it.

In summary, the best way to ensure that you get a competitive accounts receivable factoring proposal is to make sure that you manage the perceived risk of your application. You can do this by making sure that you select a factoring company that specializes in your industry, by providing a professional presentation of your company, and lastly by making sure that your application is honest and complete.

Companies that are looking for financing usually face a number of challenges. Getting conventional financing in Canada is relatively difficult. Institutions will only lend money to companies that have substantial collateral, pristine income statements, and a seasoned track record of success. Unfortunately, few small or midsized companies can actually meet this criteria, leaving them with limited options.

However, business loans are not always required to fix cash flow problems. As a matter of fact, a common cash flow problem can easily be solved with factoring. Most companies have to offer credit terms to their commercial customers. This allows their customers to pay their invoices in up to 60 days. Although getting terms works very well for customers, it doesn’t always work so well for the company that’s offering them. Few have the resources to wait up to two months for payment and need funds sooner. This is were invoice factoring comes in.

Instead of waiting for customer payments, you can enter into a financing agreement with the factoring company. The factoring company will advance funds to your company using your slow paying invoices as collateral. This gives your company immediate liquidity while the financing company holds your invoices until payment. The transaction settles once your customers pay on their regular schedule. In effect, factoring achieves something that is similar to getting quick payments from your customers without actually requiring them to pay any sooner.

Factoring financing has become very popular in a number of industries such as staffing, transportation, consulting, and oilfield services. It has a lower point of entry than most conventional business financing programs. The most important collateral requirement is to have invoices from solid customers. This is critical to the success of the transaction. Additionally, your company needs to be well managed, free of major problems, and have good invoicing practices.

The biggest advantage of using factoring comes from the fact that it’s a growth oriented product. The factoring line is designed to increase as your sales grow, which provides a stable financial platform. This makes factoring financing an attractive alternative for companies in the province of Alberta that have cash flow problems due to slow paying customers.

Specifically, factoring in Ontario can help companies that have cash flow problems because their commercial customers are taking up to 60 days to pay an invoice. This is common in commercial transactions where vendors are usually required to give payment terms (or credit terms) to commercial customers. Few companies have the required cash resources to offer terms and also cover their existing operational expenses. And those that can afford to cover their own operational expenses, seldom have the resources to take on new customers. In the end, growth is affected.

Factoring solves this problem by financing open invoices. This provides a similar benefit to getting quick payments from customers, without actually requiring them to pay any sooner. Basically, the factoring company advances funds to the client using their open invoices as collateral. The advance varies between 80% to 90% and is based on industry. This provides the client with the needed working capital to cover operating expenses. And more importantly, it provides immediate working capital to sustain growth. The transaction is settled once the customer pays, at which time your company receives the remaining 20% to 10%, less the financing fee.

Qualifying for a factoring line is comparatively easier because factoring companies have simpler collateral requirements than most lending institutions. The most important requirement to qualify is to have credit worthy commercial customers. This is very important since the whole transaction hinges on your ability to leverage your customers credit worthiness. Additionally, you need to have sound invoicing practices, be free of major problems, and have knowledgeable managers.

This solution is ideally suited for growing companies. This is because the invoice factoring line will increase to adapt to growing sales, as long as your company meets the factoring criteria. This feature, along with accessibility, makes accounts receivable factoring an attractive option for growing companies that have cash flow problems due to slow paying customers.

Most companies that sell products or services to corporate customers usually have to offer payment terms – also known as credit terms. Basically, this gives the customer up to 60 days to pay the invoice. However, your company has to pay for all expenses associated with the delivery of the product or service and then wait for up to two months for payment. Few companies have the necessary cash reserves to afford this, and most would benefit from faster payments. This leaves your company with two options – neither of which is good. You can take on a customer, offer payment terms and risk cash flow problems. Or, you can decline the sale and lose the customer.

In many cases, a better alternative is to streamline your cash flow using factoring. Accounts receivable factoring uses a financial intermediary that sits between your company and your customer. They advance money to your company while using your slow paying invoices as collateral. They also settle the transaction once your end customer pays for the invoice in full. In effect, factoring can accelerate the payments that are tied to your invoices without requiring your customers to pay sooner.

One advantage of factoring over other solutions is that it has relatively simple collateral requirements. The main collateral for the transaction are your invoices, so it’s critical to have credit worthy customers in order to qualify. Additionally, your company should have solid invoicing practices, be free of major problems, and have knowledgeable owners. This puts factoring within the reach of small and medium sized businesses.

Although factoring is popular in most provinces, factoring in Ontario has experienced substantial growth in recent years. This may be because factoring is also ideally suited for growing businesses. The financing line is directly tied to your revenues, and therefore can increase as your sales to commercial customers grow. Because of this, factoring is an ideal source of growth funding for companies that have working capital problems due to slow paying commercial customers.

If your company offers payment terms to your customers that enables them to pay their invoices and up to 60 days – and if offering terms is creating a financial hardship – factoring financing may be right for you. Invoice factoring solves this problem by using a financial intermediary to accelerate the payments that are locked in slow paying invoices. It works by having the factoring company advance funds to your business using your invoices as collateral. This provides your company with needed working capital so that it can pay it’s critical expenses. The transaction settles once your customers pay on their regular schedule.

Companies that are good candidates for invoice factoring usually meet the following criteria:

1. They have commercial and governmental customers
2. Their customers are taking up to 60 days to pay their invoices
3. They need funds sooner to pay for operational expenses such as payroll, rent, suppliers, and equipment
4. They have profit margins of at least 15% (obviously, higher profit margins are better)

One of the reasons that factoring has become popular in recent years is that it’s comparatively easier to obtain than a business loan. The most important collateral requirement is to have credit worthy commercial customers. Most factoring companies do not require additional collateral such as hard assets or real estate. Additionally, an invoice factoring line is inherently more flexible than most conventional products. The financing line is linked to your revenues and will increase as your sales grow. This makes it a perfect alternative for growth oriented companies that have working capital problems due to slow paying customers.

One way to solve this problem is to use factoring in Canada. Factoring provides a similar benefit to your company than a “quick pay”. However, instead of getting your “quick pay” from the customer, you get it from a finance company. This provides your trucking company with the capital it needs to pay its expenses and to grow. This last point is very important because few Canadian trucking companies can afford to grow and pay their expenses at the same time.

Factoring lines are usually structured as an advance on your open freight bills using two installments. The first installment covers about 90% to 93% of your outstanding invoices and is paid as soon as the load is delivered and accepted. The remaining funds, 10% to 7% (less the funding fee), are advanced as a second installment once your customer pays the invoice in full. There are some instances where factoring can be structured as a single installment, where you get the equivalent of the full advance and whatever is not advanced is considered the fee.

A factoring line will grow with your business. This is very important because usually that is when you need funding the most. The line is dynamic and will increase with your revenues as your sales grow – as long as you meet the factoring criteria.

The most important criteria to qualify for factoring is to have shippers with solid credit. This is very important because the factoring company is using your invoices as the collateral that backs the transaction. Additionally, your company needs to be well run and free of major problems. This makes freight factoring an ideal solution for growing transportation companies in Canada that have working capital problems due to slow paying customers.

Let’s first start with a quick definition the factoring. Invoice factoring is a type of financing that helps companies that have cash flow problems due to slow paying customers. Factoring finances your open invoices which gives your company liquidity to meet operating expenses. Most companies offer either of two types of factoring – recourse and non recourse.

Full recourse factoring: This is the most common type of factoring and is widely available. In full recourse factoring your company remains liable if an invoice is not paid by a customer for whatever reason, be it quality problems, financial problems, or if they simply don’t want to pay. If an invoice is not paid, you will have to pay back the factoring company either by providing a new invoice, allowing them to debit reserves, or simply paying them back.

Non-recourse factoring: This is a less common type of factoring and it’s usually very misunderstood. An non-recourse factoring works exactly the same as a conventional factoring line with the exception that you do not have to pay back the factoring company if an invoice is not paid due to an insolvency of the customer during the factoring period. This last point is often misunderstood and many business owners think that non recourse factoring eliminates any responsibilities for payment if a customer doesn’t pay. This is not true. For the non-recourse component to become effective the reason for the non payment has to be insolvency, usually a declared insolvency such as bankruptcy or closure. And more importantly, the insolvency needs to happen during that factoring period which usually is defined as the first 90 days from the time that the factoring company bought the invoice from you. As you can see, this offers a very narrow protection. While it’s a good protection, it’s not as comprehensive as many people think. Since many companies offer their own version of non recourse factoring you should always examine your factoring contracts with a competent attorney to make sure that you understand exactly what are you getting.

One common question that people ask themselves is which type of invoice factoring is better? This is subject to much debate in the industry. The reality is that every factoring company will spend a considerable amount of resources determining the credit worthiness of the invoices they buy. You can expect them to be very careful when purchasing any invoice so the likelihood of them buying an invoice that will default is usually very slim – but it happens. Ultimately it’s up to you as a business owner to determine if paying a premium for non recourse factoring is worth it.