As a small business owner, you know how challenging it can be to maintain cash flow at all times. You are also quite familiar with what happens when cash flow dries up – your business struggles to pay bills, to pay employees, to pay vendors, and just to operate on a daily basis. This is true even though you’re technically in the black (having the right list of factoring companies would help solve this challenge).
When your clients or customers owe you money, waiting for them to pay their bill in 30, 60 or 90 days can spell disaster for your company. Having access to a list of factoring companies can help ensure that you’re able to avoid that problem and gain access to the capital you need, whether you’re struggling to make payroll or you want to make sure that you’re not missing a crucial business opportunity.
What Is Factoring?
So, what is factoring, anyway? Why should you find a list of factoring companies in Canada that can offer you an injection of liquid capital? Factoring is actually one of the oldest forms of business financing, and it really just involves selling an asset for immediate cash. It’s not a form of debt, either.
Let’s say you have a customer whose bill is due in 30 days. However, you need that cash now so that you can take advantage of the deal you just found on new equipment. That equipment purchase will allow you to double your business output, creating even more success.
However, without the payment from your customer, you’re out of luck. You can’t afford to buy the equipment, and chances are good that the deal will not be available in a month’s time when your customer finally gets around to paying their bill.
Using a list of factoring companies, you can find a partner that will give you the capital you need in exchange for the outstanding invoice. That’s really all there is to factoring – you’re selling unpaid invoices to a company in exchange for “cash on the barrelhead”.
How Does Factoring Work?
Now that you know more about what factoring is, you should have at least some idea of the benefit of using a list of factoring companies to find the right partner for your specific needs. Of course, you might be wondering how the factoring process works. It’s actually relatively simple:
- You have an unpaid invoice for a customer that’s due in 30, 60 or 90 days.
- You use a list of factoring companies to find a partner that offers the benefits you need.
- You sell the invoice to the factoring company.
- The factoring company gives you an advance on the amount of the invoice, usually between 70 and 90% of the total.
- You use the advance for whatever you need (it’s your money, after all).
- Your customer pays the invoice.
- The factoring company pays you the remainder of the invoice amount, less the fee you agreed on.
- You’re done.
As you can see, it’s a pretty straightforward process. However, there are a few things you’ll need to know about choosing a partner from a list of factoring companies. While there are many factoring firms in Canada, they’re not all identical, so you’ll need to choose with care. In many instances, it’s best if you work with a specialist firm, rather than a generalist firm.
The Need to Consider Specialised Factoring Companies
Why consider using a list of factoring companies to locate one that specialises in your industry? In some cases, specialisation doesn’t really matter that much. For instance, let’s say you run a hardware store, and a large customer recently purchased a hefty order of tools. This is a normal retail transaction, and there is little specific knowledge and expertise needed.
You can work with a generalist firm easily. However, what if you operate a transportation company, or a construction firm? What if you have a staffing company, or a manufacturing firm? These industries differ greatly from one another, and navigating the ins and outs does require considerable expertise and knowledge on the part of the factoring company that you choose.
Working with a specialist firm ensures that you’re partnering with a company that has in-depth experience in your specific industry, not a company that has only dealt with one or two companies in your area, or has never worked with a client in that industry. Obviously, the more unique your industry, the more this matters.
After all, you wouldn’t go to a general practitioner to have a cavity filled, so why would you work with a generalist factoring company if you have very specific requirements? For the majority of business owners, a specialist is the better choice.
Benefits of Working with the Right Factoring Company
In addition to the question of working with a generalist or a specialist factoring company, there is the need to use a list of factoring companies to compare your options and choose the right match for your needs. Even among companies that specialise in your industry, there can be significant differences. The right company will provide the benefits, tools, solutions and perks that match your requirements.
What might those include? Here’s a quick glance at just some of the things that might (or might not) matter to you when comparing options on a list of factoring companies:
The right advance amount: As mentioned, the average advance is 70 to 90% of the invoice amount. However, that’s a very rough rule, and it’s obviously in your best interests to find a factoring company that advances as much as possible. The more the advance, the more liquid capital you have access to, right? Of course, you’ll need to balance that against the fee being charged.
The right type of factoring: There are multiple types of factoring out there, but two of the most common are recourse and non-recourse. Both give you access to the capital you need immediately, but they differ from one another in some key ways.
Recourse factoring means that if your client defaults on the invoice, you’re responsible for repaying the factoring company’s advance. That can be tough to do if you’ve already spent it. However, this type of factoring usually has the lowest fees (because the company takes on less risk).
Non-recourse factoring means that if your customer defaults on the amount owed, the factoring company is responsible, and you’re not on the hook. That’s a much better position for you, but the fees for this type of factoring can be much higher (more risk to the factoring company).
Understandable fees and charges: While you’ll definitely pay a fee for factoring, some companies assess other charges. It’s vital that you understand what charges are applied, when and why during the process.
You’ll find that some factoring companies charge you an application fee, while others have hidden charges and fees that aren’t obvious unless you read the fine print on your contract. Find a factoring company that assesses the fewest charges, and is transparent about their fee structure.
Perks that matter to your business: While some factoring companies do little more than offer an advance on outstanding invoices, others go farther. For instance, many factoring companies that specialise in the transportation industry offer free fuel cards to their clients as a perk (and to help them save money). Other perks might include credit checking on clients or customers, acting as your billing department, performing collections and more.
Ongoing factoring requirements: You’ll want to make sure that you understand the company’s requirements in terms of ongoing factoring. Some allow you to factor invoices at whim, but others will require that you sign a long-term contract, or that you factor all invoices for a particular client through them moving forward.
These are only a few of the most crucial factors to consider when choosing a partner from a list of factoring companies. There are others, and many may be determined by your specific industry (which brings us back to the whole generalist versus specialist discussion).
What Should a List of Factoring Companies Contain?
A list of factoring companies can provide you with invaluable benefits. One of those is shortening the time required just to research and find Canadian factoring companies. While you can most certainly search the Internet on your own and manually compile a list, you have a business to run, and every minute spent searching the World Wide Web is one more minute that you’re not building profitability in your company.
Another benefit to a list of factoring companies is that they’re generally sorted by industry served. While this is not true across the board (you’ll need to ensure you’re using a list provided by a reputable partner), it can greatly reduce not just research time, but the time needed to sort through your options. With an accurate list of factoring companies sorted by industry, you can easily find a firm that specialises in your particular area.
Yet another advantage of using a list of factoring companies is that each firm should be listed with the services, benefits and perks offered to clients. This could include online access, credit checking, collections, billing, fuel cards (for transportation, manufacturing, warehousing/logistics, and other industries), and a great deal more. It really provides the means to shortlist the options that appeal to you most.
Once you’ve found a list of factoring companies and used it to sort through your options, you should have a few compelling choices. Now is when you’ll need to contact each company and interview them. This is a crucial step that too many business owners miss. They allow themselves to be overwhelmed by the need for quick cash, and choose the first option on a list of factoring companies.
The problem here is that you’re not giving yourself the opportunity to compare one factoring firm to another. The interview process allows you to ask questions, determine if the company really does specialise in your industry, learn more about their fee structure, and determine if they’re the right fit for not just your area of expertise, but the size of your business and the amount of the invoice itself. Many factoring companies tend to focus on deals within a specific amount range, and if you fall above or below this, they may not serve your needs well.
After interviewing (and further weeding through) your options, it’s time to submit the application. Ideally, you’ll apply with at least of the firms on the list of factoring companies. When they return the proposal, you’ll want to compare them side by side.
Look for some key elements before deciding which proposal to accept. Obviously, the amount of the advance is going to be a key factor, but you’ll also want to compare the rate being charged, the reserve requirement, the length of the contract, associated fees being charged, and any perks or benefits offered by each company.
The final step is to accept one of the proposals you’ve been given, and sign the contract. However, it’s important that you fully understand all the terms and requirements spelled out in that contract before signing it.
Eliminate Complications and Confusion
Finding the right partner can be difficult, even with access to a list of factoring companies in Canada. There’s a lot of ambiguity here, and some companies can hide fees very well in the fine print of their contracts. We’re here to help. We invite you to take advantage of our free consultation with one of our factoring specialists. It’s never been simpler to find a factoring partner to ensure that you have the liquid capital you need for business growth.