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Factoring
and Financing Press Room |
Click on each Link below to view articles of interest
regarding accounts receivables factoring and SR&ED financing.
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TCE Capital Gives Credit Where Credit is Due
TCE Capital helps outstanding growth companies that have
encountered cash flow problems for all the right
reasons. |
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Why use Invoice Discounting
When timing and access to working capital are critical,
Invoice Discounting (also known as Factoring) is a
practical alternative to traditional methods of
financing. |
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Role of the Invoice Discounter (or Factor)
Insufficient cash flow could be resolved, as it has been
for many years, if a company utilized its accounts
receivable by selling them at a discount. |
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Fraud Prevention
In any commercial fraud, a materially false statement
must either be made or written and relied upon by the
victim and that reliance must result in damages. |
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Role of the Invoice Discounter
(or Factor) |
Start-up and growing companies often lack the
money needed to get quickly established or to
take advantage of situations requiring cash flow
in order to generate revenue. In many instances,
by the time outstanding accounts receivable
generated by the company are collected, the
opportunity for quick revenue and eventual
profit has been lost.
Insufficient cash flow could be resolved, as it
has been for many years, if a company utilized
its accounts receivable by selling them at a
discount, also known as invoice discounting or
factoring, to a company specializing in
providing working capital financing to Canadian
businesses. Invoice discounting or factoring is
but one service provided by some Canadian
companies offering working capital.
This service is often not utilized for two
reasons: The business person is either not aware
of the service or, the service is not seen in a
favourable light because full knowledge of how
it works and its benefits are not known or
appreciated.
Factoring is not new. The present day norm of
factoring or invoice discounting evolved into
its present form from its genes: over 300 years
ago when English textile mill merchants sold
products to customers across the Atlantic. The
agents in America would find buyers in America,
guarantee payment and collect the proceeds of
sale for the textile mill merchant in England.
As a result, factoring or invoice discounting
was born. The basic concept has changed little,
but it has evolved into probably the most
efficient collateral management industry in
North America. It is a multibillion dollar
industry in both Europe and the United States. |
It has been in Canada on a smaller scale for
some time, and commenced in the garment industry
in this country. Over the last 30 years or so, it
has evolved into what is now a sophisticated,
well-organized, client service- oriented and
highly reputable industry.
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Advantages of income discounting or
factoring
The advantages may be summarized by the cliché
of spending money to make money. In addition to
the assignor company making money, which may not
have been the case without the relationship
between the working capital company and its
assignor client, other advantages may result.
When a company pays its suppliers before
collecting its receivables from its customers,
the cash drain may present a financial need. The
cash gap could be alleviated by attempting to
get cash by quickly selling inventory coupled
with avoiding paying suppliers as long as
possible. Concentrating on selling fast-moving
inventory, giving discounts to early paying
customers, as well as negotiating extended
credit terms with suppliers, can reduce this
cash gap. Some or all of these efforts may not
be in the best longterm interest of the
business, requiring extra time and effort and,
in the end, may not be sufficient to eliminate
the problem. Small businesses may also lack the
clout to negotiate extended terms from
suppliers, and do not have the necessary
resources to devote to the expeditious
collection of its accounts receivable.
The possible solution: the business sells its
good accounts receivable at a discount to the
invoice discounter or factor. Certainly this is
spending money to make money. The money spent
can be translated into the discount taken from
the face value of the accounts receivable after
collection by the factor.
Mechanics and benefits of factoring or
invoice discounting
The money made by the assignor company results
from having the necessary cash to actually carry
on business which may have been dormant without
the cash from the sale of the accounts
receivable. Self collection of receivables could
result in the decision to sell part of the
equity in the company to a third party, or
possible insolvency, either of which would not
be by choice. The money made results from having
the necessary cash to actually carry on
business, which may have been effectively
inactive or not carried on as vigorously or as
productively. |
In a typical factoring scenario, the business
sells its accounts receivable to a factor and
receives up to 90 percent of the face value of
the invoices sold. After collection, the factor
retains between two percent and five percent per
30 days of nonpayment, of the face value of the
invoices. The balance of the collection is then
remitted to the client. |
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The immediate cash as a benefit is obvious.
Other benefits include improved credit ratings
resulting from prompt repayment of debt and cost
savings as a result of reduction of time and
money spent managing the collection of
receivables. These benefits provide management
with more time to focus on growing a successful
and better managed business.
The role of the banker
Businesses that factor their receivables often
experience rapid growth, which could result in
exhausting lines of credit and the capacity to
borrow from their bankers. Even if this were not
the case, bankers tend to move slowly to either
increase lines of credit or to provide
short-term cash necessary for its clients to
take advantage of those windows of opportunity.
On the other hand, the factor moves quickly,
reviews the opportunity presented and advances
funds in a matter of days, not weeks or months.
Banks approve loan applications on the basis of
historical financial performance. The factor
approves dealing with the potential client, not
only on the value of the receivables, but on the
client’s potential for success.
The banker and the factor should work in concert
together for the benefit of their mutual client.
In most cases, the banker remains the banker and
will continue to have a first-security interest
on the assets of its client, except for the
accounts receivable purchased by the factor.
This may involve a priority agreement between
the bank and the factor. The relationship
between the client and the factor should be
viewed by the bank as in the best interest of
its client. The entry into a priority agreement
should not pose a problem.
Goals of the factor
Obviously the factor is in business to
make money. However, the relationship between
the factor and client enhances the business by
removing the collection task from the client.
Other benefits may also result. There will be
fast needed cash for the business, the client’s
credit rating should be better and management
will be freed up in order to run a successful
business. It should be a short-term relationship
necessitated by opportunity. The request could
be a bulge or bridge financing. The former may
be the result of the client being on the verge of
the borrowing limit set by its bank. The latter
may be the result of requiring cash while
changing banks. In any situation, a good factor
should attempt to get in and out quickly after
the need of its client has been eliminated.
It is not in the best interest of any Canadian
business to pay money even to earn money for any
time longer than necessary; nor is it in the
best interest of the reputation of the factoring
or working capital community to do otherwise. |
Client’s cost dependent on risk to factor
Assume that a potential client has a viable,
profitable business; possesses a significant
number of good receivables with a history of
payments standard in the relevant industry, with
no unusual administrative costs; and agreement
has been reached, or dictated, that the
factoring will be with recourse back to the
client in the event of nonpayment. |
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The risk to the factor appears to be primarily what determines the
discount rate. The risk is tied into how it sees
its ability to collect and deal with the
assigned receivables. In some situations, the
risk may be reduced by the client. In others,
the client may have little say because of the
factor’s policy or what the factor has
determined in the circumstances. In those
situations where the risk may be reduced, the
notification or the degree of notification of
the assignment to the account debtor is
paramount in determining the risk in the eyes of
the factor.
The client may be adamant that the account
debtor not be notified in any manner of the
assignment or sale of its receivables to the
factor. On the other hand, the factor is aware
that without or before notification the account
debtor may continue to pay and deal with its
creditor directly and has a right of set-off in
respect of unrelated obligations arising
subsequent to notification of assignment. The
factor is and should be most comfortable with
notification of the assignment.
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On the assumption that nonnotification is
acceptable to the factor, the risk of
noncollectability has increased. As stated, the
ultimate protection in the eyes of the factor is
notification of the assignment coupled with a
direction, probably a stamped notation on the
invoice that payment must be made directly to
the factor at its address, as well as an
acknowledgment by the account debtor of the
assignment.
Where the client insists on nonnotification, it
will continue to collect the receivables, which
must by agreement be held in trust for and
remitted to the factor. There is a middle
ground. Payment may continue to be made to the
client, but directed to a new address (that of
the factor), without a clear notification that
the receivables have been sold or assigned.
Further, by agreement, there could be no
notification to the account debtor, except in
the event of given defaults. The factor will no
doubt insist on blanket notifications, which by
agreement will not be implemented or given to
account debtors unless and until there is
default under the terms of the factoring
agreement.
If the client is of the opinion that
notification will probably not significantly
negatively affect its business or business
relationships, and is able to rise above the
psychological hurdle or stigma, as seen by some,
then agreement on full notification should
warrant the best discount rate. If the factor
agrees, a middle ground as to the nature of
notification may be established, taking into
consideration the view of the client of the
factor concerning the possible harm to its
business if there were complete and full
notification.
View and Print a Copy of this Article (pdf
format, click below)
Role of the Invoice Discounter or Factor
Peter D. Wendling is an attorney who practiced
law in Toronto for many years, specializing in
asset-based financing and factoring or invoice
discounting. He currently is a consultant to TCE
Capital Corporation in Toronto.
Contact TCE Capital today at (800)
465-0400 for additional information on working
capital and cash flow funding programs available
through invoice discounting and accounts
receivables factoring. |
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