Josée Descôteaux | Journalist
Dealing with all the tasks of running a business is something of a balancing act. Between managing inventory, attracting new clients and paying bills, you also have find time to collect your accounts receivable. It can be overwhelming. Fortunately, you have a solution: factoring. These are the fundamentals of a solution that lightens the entrepreneurial load.
The road from selling your product or service to collecting payment can seem like a long one, but factoring is a good solution for managing liquidity. It's fairly straightforward: your financial institution (the factor) purchases your client accounts, giving you immediate access to your funds. The factor then takes care of managing your accounts receivable, and you don't have to wait for the end of the payment term on your bills.
"We buy bills, but we also manage them for entrepreneurs who may not have the time to follow up on accounts receivable," says Réal Leclair, a supply chain management expert at Desjardins.
Factoring is quick, with just a few steps. Simply make sure your bills, purchase orders and proofs of delivery all match up, and your funds are available within 24 hours of assigning the debt! "There are no legal fees and no reports to produce; everything is done by the financial institution," Leclair says.
The accounts receivable for small, mid-size and large businesses that sell products or services are eligible for this service, except for:
- Companies selling consumer goods
- Companies associated with general contractor construction contracts
- Companies that are billed before work is completed
Factoring is useful in many situations, but it's especially helpful for companies that:
- Are growing fast
- Recently won a new sales contract
- Provide seasonal services
- Grant extended payment terms (e.g., net 90 days)
- Occasionally or regularly exceed their operating credit
Complementary and cost-effective
Factoring complements traditional financing. It's worth considering because you get up to 90% of the purchase price of receivables (of the cash purchase price) without having to wait until the payment due date. The remaining 10% of the balance (the deferred purchase price) is deposited as soon as the client pays. You can use factoring whenever you like--once, ten or even a hundred times a year.
It's too good to be true, so this service must cost an arm and a leg, right? Wrong! The cost of factoring is only slightly higher than a line of credit, but there are significant benefits.