How To Decide If Financing Receivables Is a Solution for Your Working Capital Funding
We call it the R R factor. And we are not discussing rest and recuperation! The R R factor gives you a sense it’s once again time to take into account whether a newer, popular way of financing receivables will be your working capital funding solution.
We’re going to supply you with a quick but easy and powerful tool to discover if the earnings challenges need to be addressed more positively. It’s the receivables to revenue ration – hence the word R R. First, require a year-end balance of A/R, which is, of course, your uncollected sales revenue at that time soon enough. Then determine how weeks of sales to display. Calculate this ratio historically along with an approach to determining whether your cash flow and dealing capital requirements are changing.
So what makes business address the challenge of working capital funding when it’s as challenging as always to borrow. Many companies are assessing factoring or financing receivables. It’s a simple process that is made complex and difficult once you do not understand the pricing, how it works each day, or perhaps the important should align yourself which has a partner that provides and matches your organization’s financing needs.
The process is quite easy — On a daily, weekly, or monthly basis – it’s your choice, you sell your receivables. So what happens next? Simply the day you generate that sale there is fast cash for those receivables. Therefore the Canadian business proprietor and financial manager are creating an authentic ATM out of the investment the business has in accounts receivable. Readers will likely commence to immediately appreciate they may have just found the ultimate cash flow solution, because should they sale they have instant cash. So what’s the catch?
We believe there are 2 catches when the business proprietor understands and addresses them the receivable financing solution becomes much more clear and sound judgment.
The first ‘ catch ‘ may be the cost. The typical Canadian cost of financing a receivable is 1.5- 2% / month. The firms providing the service usually do not call an interest rate, they refer to it a reduction fee. You sold something, for cash, i.e. you’re receivable, plus it was discounted by 1 or 2% with the privilege. Is expensive. Absolutely… maybe! That is because most business people don’t recognize the fact they are in effect carrying those receivables already, that is a cost that is certainly often not intuitively calculated through the small business owner. Secondly, the term ‘ opportunity cost ‘ will come in to try out, since the reality is that in case your firm can generate a fantastic return you can use the cash flow from the receivable financing to create higher profits.
So why isn’t factoring or receivable financing a choice of every Canadian business for working capital funding? The truth is, which can be a surprise to many people, that these largest firms in Canada utilize this financing. They simply have a stronger ability, because of their financial strength, to discover the way the facility works each day, the top form of the facility we recommend to customers is a by which your firm can bill and collect unique receivables, which is not provided by 99% of firms inside the Canadian marketplace. Search out that 1% solution is that which you tell our clients – at that point, you will have a very competitive financing vehicle for working capital and virtually unlimited cash flow growth.
Speak to your trusted and credible business financing advisor who can assist you to build a solid working capital funding solution.