Canadian Rental Service

M & A Matters: September 2014

By Mark Borkowski   


A familiar but difficult scenario unfolds. You are the owner or CFO of a growing company.

A familiar but difficult scenario unfolds. You are the owner or CFO of a growing company. Sales are up 20 per cent over last year. Success is causing stress. You need a source for some quick capital to keep the company on track. Business is booming, but you are experiencing a cash flow crunch. A cheque expected from your largest customer has not arrived and your payroll is due tomorrow. The phone rings and your call display tell you that your key supplier is phoning you for the third time this week. You know what he wants, so you avoid speaking with him. Your banking facility and your charge cards are maxed out. What do you do?

When timing and access to working capital are critical, invoice discounting, also known as factoring, is a practical alternative to traditional methods of financing. We are living in volatile economic times, which are causing traditional lenders to reduce their exposures. A slow-motion credit crunch is underway. Banks are tightening their credit standards in the face of problem loans and declining credit quality. Small- to medium-sized enterprises are most vulnerable to reductions or withdrawal of operating facilities for working capital under this scenario.

Invoice discounters provide more funds or availability than traditional lenders and a regular, predictable cash flow as and when it is required. Factors often provide advances by working behind the bank as a source of secondary working capital. Factors can improve banking relationships, as clients can remain in covenant and in margin.

Invoice discounting facilities are higher because they are linked to sales and not to rigid balance sheet criteria. Decision-makers within factoring companies better understand your business and the variables affecting your normal course of business, including seasonality issues. Factors inherently offer a more favourable assessment of risk. They are more inclined to rely on the quality of the product or service rendered and the credit quality and standing of the client to repay advances rather than only looking at the strength of the client’s balance sheet. Quality of accounts receivable is the important variable, not equity base, liquidity, or cash flow. Customer credit limits are established on a pre-screened basis, allowing clients to stay away from potential problem accounts.


Factors have a proven history of leveraging assets leading to accelerating sales growth and greater profits which offset invoice discounting costs. This allows you to promote your business with confidence. Opportunities to do more business are not lost to competitors.

Invoice discounting terms and conditions vary, but there are some common principles. Proposals or term sheets can be issued to potential clients in as little as two days upon receipt of the required information. Invoice discounting fees vary from two to five per cent (or more) for each 30 days, calculated on the gross sale value. No minimum term (length of time) contract is required — this means that a client can work on an as-needed basis. Customers are usually made aware of the invoice discounter’s involvement and agree to send their payments directly to the invoice discounter. 

Factoring involves purchasing business-to-business (commercial) invoices at a discount. Factors buy and the client sells invoices. Clients are advanced funds on invoices due from creditworthy customers and account debtors, and advances range from 75 to 90 per cent. There are two types of factoring products available: recourse and non-recourse.

Whatever the source of capital, the banks have been very difficult on all companies. Wise executives need to consider all of their financing options.

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