The business community in Calgary is growing. Invoice factoring is becoming increasingly popular within the business-to-business and business-to-government sectors. It’s a financial service that allows invoice companies to cash in their invoices sooner rather than later as an advance with interest. There are a few invoice factoring companies in Calgary to consider through Smarter Loans. You can expect reliable service from providers that, within days, you’ll see the funds from your invoice.
Factoring occurs when a company sells one or more receivables bills owed on credit terms to a financier or factor for less than what it owes. Factors make money by offering discounts combined with additional fees. By collecting the full invoice amount from the original business’s customer, the factor (hopefully) recovers the total factoring payment.
For instance, Company X trades a product to Customer Y for $50,000 with an invoice due in 60 days. Company X owes $30,000 to one or more of its suppliers in 30 days. Company X would sell the $50,000 invoice to Factor C for 90 cents on the dollar, or $45,000. To reduce risk, Factor C may pay this in one lump sum or on a schedule.
Why would a business sell their invoice for less than what other companies owe them? Sometimes short-term debts exceed cash on hand. Therefore, a business will sell enough invoices to collect some money immediately from a factor to make their short-term debt payments. It’s not a company’s position, but it is a financial tool to boost cash flow when needed.
Types of Factoring in Calgary
In Calgary, you can find the following factors:
- Oil and gas factoring
- Non-recourse factoring – meaning that if the client cannot pay the invoice, they absorb the loss, and the company owner owes nothing to the lender.
It usually takes 24 to 48 hours to cash invoices, depending on the amount owed and the nature of the deal.
A good business factor in Calgary offers simple credit qualification requirements, asks for no upfront fees, and offers free credit checks on business clients.
Besides working capital services, business factors offer:
- Asset-based lending – They base these loans on a company’s assets, such as inventory and customer receivables. To qualify, the company must have sustained operations for at least six months and have earned at least $1 million in revenue.
How Does Factoring Work in Calgary?
Here’s how the factoring process happens in Calgary:
- The factor receives a copy of the invoice that was sent to the client
- Factors verify invoices and run credit checks on their clients
- Factors advance businesses part of the invoice amount
- Invoices paid to the factor are then deducted from any discount. And they send any added fees and the rest to the business. Fees and discounts are the factoring costs.
Qualities of Factoring a Business in Calgary
Factoring is only available to businesses with creditworthy clients. Factors run credit checks on the business’s clients (called “account debtors” by factors) to determine their creditworthiness.
Factored invoices must also be free of liens, whether a lender, a lender’s agency or a tax agency holds them.
Businesses should use straightforward billing arrangements and make invoices difficult to dispute so that factoring or a different working-capital facility that relies on invoices will be easier to get.
Invoices are not helpful when you are dealing with progress billing, consignment sales, or contingency billing.
A loan might better secure an invoice that is pledged to someone else. Businesses can avail themselves of revenue-based, asset-based, and working capital loans through business factors.
Documentation Needed to Factor in Invoices
There will be some due diligence performed by any factoring company that buys invoices in Calgary. The documents required by each factor may differ.
For smaller transactions (less than $250,000), Business Factors requires invoices, an application complete with all necessary licenses and permits, and aging schedules of accounts receivable and accounts payable.
Depending on the industry and state, there could be licenses or permits needed for trucking, freight, or workers compensation coverage in both the U.S. and Canada.
A financial statement, copy of the articles and certificate of incorporation, and proof of the work completed are required for accounts larger than $250,000.
Do Businesses with Credit Issues Benefit from factoring in Calgary?
Unless your business has a long or problematic credit history because of tax liens or a bankruptcy, factoring can be an ideal alternative option for startups and small businesses.
However, companies that want to factor in invoices cannot pledge the invoices to a bank or tax authority. It is not uncommon for Business Factors to work with seasonal or high-risk businesses that cannot get bank loans because of limited collateral or short credit history.
For healthy companies looking for ways to fund growth, handle unexpected payroll increases, or even smooth out uneven cash flow, factoring may be a great option.