How to Use a Factoring Company to Improve the Cash Flow of your Canadian Business

Having sufficient working capital to operate your business on a is critical if your company is to prosper. Without it, you won't be able to meet current liabilities such as rent, payroll and supplier payments. When faced with cash flow problems, many owners try to ignore the problem by waiting before taking action. The hope that the problem will solve itself. This seldom happens. While a cash flow problem may be solved temporarily by a quick customer payment, chronic cash flow problems seldom fix themselves and need management action.

One of the more common causes for cash flow problems is offering net 30 or net 60 terms to clients. By offering terms you are effectively delaying your invoice payment. However, usually, you are still liable to pay your suppliers and employees quickly. This creates a gap between when you need to pay liabilities and when you will receive income from an invoice.

Many companies can bridge this gap by using their own fund reserves to cover expenses. Those that don't have their own reserves usually try to get some form of business financing to cover the gap. Frequently, an owner will approach their local banker hoping to get a business loan. While business loans can be used to correct this problem, they are better suited for buying assets rather than covering cash flow problems. For many companies, a better solution is to use invoice factoring.

Invoice factoring, a form of financing offered by a factoring company, provides an immediate advance on invoices that are payable in 15 to 90 days. This provides the cash flow to cover operating expenses, helping ensure that your company can deliver on its promises. Factoring has a number of advantages. The most important one is that the credit quality of your customers plays an important role in the transaction, and for the most part, determines the amount of funding you can get. This feature makes factoring very dynamic as your financing line can grow as your billings grow.

Factoring companies structure the transaction in two payments. The first payment, about 80% of the invoice, is funded as soon as the invoice is presented to the client. The second payment, about 20% (less the fee), is funded once your client actually pays the invoice.

Factoring is a great solution for companies that have great potential but can't afford to wait to get paid by the clients.