Invoice Discounting / Factoring


Overview:

  • Manner in which to acquire flexible, quick, working capital financing.
  • Geared to small and mid size companies including start-ups with customer traction.
  • Involves the outright purchase of receivables whereby a company sells its invoices (accounts receivable) for immediate cash.
  • Invoice Discounting is one of the oldest forms of commercial finance. Very common in such countries as USA, Britain, Italy, France,Germany,SpainandJapan.
  • Invoice discounting does not require corporate or personal credit strength. Can be used in conjunction with traditional lending.

Why Use:

  • Is your growth outstripping your working capital?
  • Are you negotiating a new bank loan or are expecting an injection of equity capital and could use a “bridge” loan?
  • Bank loan not a viable option. Lack of history or by choice.
  • Bank line been called, revoked, curtailed.
  • Use in conjunction with EDC to eliminate bad debt.
  • Provides instant cash.
  • Not a loan … “off balance sheet” financing.
  • Improves your banking relationship thru improved financials.
  • Improves “earnings”, ROCE, ROI.
  • Credit focus is on the creditworthiness of your client vs. your balance sheet.
  • Increases sales thru the granting of credit.
  • Unlimited credit.
  • Smoothes the business cycle of seasonal businesses.
  • No long term commitments. Use on an as needed basis. Spot Factoring.
  • Hedging to protect profits.
  • Finance an acquisition.
  • Hire additional employees.
  • Allows the outsourcing of the credit and A/R functions.

Understanding Invoice Discounting/Factoring:

  • invoice discounting = factoring
  • Terms:
    • Advance: the portion of an invoice that a factor forwards to the client. i.e. on an 85% advance basis $8,500 cash would forwarded to a client within 24 hours on a $10,000 invoice.
    • Spot Factoring: financing which is based on an individual or specific invoice or invoices.
    • Non-recourse: the factor assumes the entire burden of collection and risk of bad-debt losses.
    • Recourse: the factor will work the receivable until a previously agreed upon date and if invoice remains unpaid will then the receivable back to the client for resolution.

Who:

  • Any company that generates commercial invoices collectible in 15-75 days.
  • Creditworthy clients.
  • Profitable revenues.
  • Individual invoice amounts $100-$1,500,000.

Process:

  • Complete application (Evaluation form).
  • Conference call and submit documentation ie A/R & A/P aging reports, 1st pg of Articles of Incorporation.
  • Term sheet is issued by factor within 3-8 business days. Term sheet specifies legal obligations of both parties.
  • Execute term sheet and provide requested supporting documentation.
  • Submit customer orders for credit check and approval.
  • Product produced, shipped and invoice generated.
  • Customers are notified to remit directly to the factor.
  • Invoice submitted to factor and customer acknowledges receipt of product/service in good working order.
  • Funds advanced within 24 hours. Advance amount as per term sheet.
  • Upon payment of invoice, the difference between the advance and the total invoice amount is forwarded to you less the factor’s fee.

FAQs:

  • How long has factoring been around?
    • The practice of factoring is a wide spread and well established form of business financing dating back hundreds of years. Very common in many countries:USA,Britain,Italy,France,Germany, andJapan. Worldwide, factoring is a trillion dollar business but fairly unknown inCanada.
  • Is there any start-up or legal fees?
    • Depends on the circumstances and rates but in general fees are $500.
  • Isn’t factoring expensive?
    • Factoring is not a perfect fit fo r all companies all the time but does have its time and place.
    • The advance (70%-95%), fees (1%-5%/month) depend on a number of factors: credit-worthiness of client, total volume, size of facility, number of customers, number of invoices, risk, payment terms, average invoice size, annual sales volume of customer etc.
    • Consider:
      • ROI vs. lost opportunities … how will cash generated thru factoring effect the bottom line?
      • Bank fees: annual fees, admin fees, review fees etc Actual bank line costs are closer to 20%.
      • Take advantage of discounts from suppliers.
      • 2% net 10. Factoring costs are entirely offset by customers who take advantage of the 2% discount but not honour the 10 days.
      • Non-recourse factoring completely eliminates bad debts.
      • If desired, factor performs the credit, collections, A/R functions.
      • Factoring/invoice discounting is NOT debt and as such is “off balance sheet financing”.
  • What will my customers think?
    • Good chance that your customer is already remitting payment to a factor … maybe even us!
    • There are many reasons why companies take advantage of factoring i.e. experiencing fast growth, wish to take advantage of an opportunity, do not wish to go the equity route … all positive reasons.
    • 80% of companies who take advantage of factoring do so for growth reasons.
    • Means your company is healthy as a factor will not take on a client that is on verge of disappearing. Shell Oil, IBM, Georgia-Pacific, Mitel, Nestle and other large firms factor millions annually.
  • What are best invoices to factor?
    • Invoices from creditworthy customers that are collectable in 15-60 days.
  • Are personal guarantees required?
    • Usually but not in all cases.
  • Will factoring help my company?
    • Factoring can be very useful for businesses that wish to expand, can’t get a bank loan or an increase on their bank line or who wish not to incur debt.
  • When can I expect to receive my advance after submitting approval invoice to factor?
    • Within 24 hours.
  • What is the smallest invoice which you will factor?
    • Will entertain invoices in the range of $100 to $1,500,000
  • Is it required that we factor all of our A/R?
    • No. You may spot factor.
  • What is the range of the total financing “facility” that you will fund?
    • From as small as $5,000 per month to $1,500,000.
  • Can I factor invoices generated to non-Canadian customers?
    • Yes. Invoices from good quality customers located throughoutCanadaandUnited States. Other international invoices depending on the circumstances.
  • What reports will I receive?
    • Depends on your requirements which effects discount fee but in general a report which indicates the invoices factored, advances made, fees and cash received.
    • Reports available on-line.
  • From which industries will invoices be purchased?
    • Too many to list: including but not limited to: technology (hardware/software), office equipment, furniture, aerospace, food, energy, plastics, printing, transportation, apparel, manufacturing, industrial supply and automotive industries.
  • Who buys our Accounts Receivable?
    • Our sweet spot is $5,000 to $1,500,000 … if we cannot offer a facility then we will “broker” to a partner.
  • How to get started.
    • Complete Application form and we will contact you to discuss optimum solution for your circumstance.

 

SR&EDS (stand alone)

What:

-        A loan based on the filing of Scientific Research & Experimental Development

-        Range: $100k-1M, 70% advance of the gross value (outside of ON min is $250k)

Criteria:

-        Either a track record of SR&ED filings or a recognized 3rd party preparer and a 2nd source of income.

-        Security: GSA & personal guar.

Timing:

-        Application at time of filing SR&ED which is 6 mos from fiscal yr end (incl corp tax filing)

-        Term sheet: 3-5 days. Turnaround/closing: 10 working days

-        Max months outstanding 6/8 months. Can be extended. Average is 4 months.

Costs:

-        Monthly fee 2-3%

 

ABOUT THE  SR&ED Program

The Scientific Research and Experimental Development (SR&ED) program is a federal tax incentive program offered by the Canadian government  to recover from 28% up to 82% of qualifying expenditures.
These incentives, received in the form of tax refunds or tax credits, are meant  to encourage Canadian businesses of all sizes, and in all sectors to conduct research and development (R&D) in Canada, leading to new or improved products and technological processes.
These R&D tax credits   can be a tremendous source of financial support for Canadian   companies.  However, our experience has shown that many companies, of   all sizes and across different industries have no knowledge of the   program, how to apply the program guidelines or defend a claim for their   specific situation.

 

Key Features

  • Refundable tax credit from 28% up to 82% of qualifying expenditures.
  • A   Canadian-controlled private corporation (CCPC) can earn an investment   tax credit (ITC) of 35% up to the first $3 million of qualified   expenditures for SR&ED carried out in Canada, and 20% on any excess   amount.
  • Other Canadian corporations, proprietorships, partnerships, and trusts can earn an ITC  of 20% of qualified expenditures for SR&ED carried out in Canada.
  • Additional provincial credits, ranging from 4.5% to 37.5% depending on taxable income and province.
  • An immediate deduction for all R&D related labour, material, capital and certain overhead costs.

Eligibility

  • Wages and salaries
  • Material
  • Sub-contractor expenditures
  • Overhead costs
  • Capital expenditures
  • Equipment leases

 

 

NOTE: If you are interested in this Fed R&D ‘grant’ – please inform and we will ‘connect the dots’ (intro you) to the largest consulting firm.