Beyond Bank Loans: Why Canadian Businesses Are Turning to Accounts Receivable Finance

Accounts Receivable Finance: A Guide to Financing

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Receivable services (often known as factoring) related to purchasing financing are often a significant point of discussion regarding two areas of consideration - how they work on a day-to-day basis and, of course, pricing.

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Account receivables are classified on a company's balance sheet as money owed by clients for services rendered on credit. They play a crucial role in cash flow management.

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Breaking Free From The Invoice Waiting Game

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Your business delivers products and services but waits 30, 60, or even 90 days for payment. Meanwhile, expenses pile up, growth opportunities slip away, and stress mounts.

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Let the 7 Park Avenue Financial team show you how Accounts receivable finance eliminates this waiting game by converting outstanding invoices into immediate working capital. This allows your business to maintain momentum regardless of customer payment timelines.

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What is Accounts Receivable Financing?

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Accounts receivable financing is a financial solution that allows businesses to leverage their outstanding invoices to secure immediate cash.

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This type of financing, also known as receivable or unpaid invoice financing, enables companies to convert their invoices into cash almost instantly.

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Businesses can effectively manage their cash flow and enhance their working capital. This method is particularly beneficial for companies that experience delays in receiving customer payments, as it provides a steady influx of cash on a weekly or monthly basis.

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HOW DOES AN AR FINANCE SERVICE WORK?

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Some might say that some rough waters relate to this aspect of Canadian business working capital financing.

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We’ve got some thoughts on pricing, but our real focus on? AR finance today is how accounts receivable financing enhances business cash flow. Let’s dig in.

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Accounts Receivable Financing Process

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The accounts receivable financing process is straightforward and typically involves the following steps:

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1. Application: The business applies for accounts receivable financing with a lender, providing necessary documentation such as outstanding invoices and financial statements.
2. Review: The lender reviews the business’s outstanding invoices and assesses the business's and its customers' creditworthiness.
3. Advance: Upon approval, the lender advances a percentage of the invoice value to the business, ranging from 80% to 90%.
4. Utilization: The business uses the advanced funds to meet its financial obligations, such as paying suppliers or covering operational expenses.
5. Payment: The customer pays the invoice directly to the lender.
6. Settlement: Once the invoice is paid in full, the lender releases the remaining balance to the business, minus any fees and interest.

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This process allows businesses to access funds quickly, ensuring they can maintain smooth operations and manage their cash flow effectively.

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A/R FACTORING SOLUTIONS ARE THE MOST POPULAR NONBANK TYPE OF FINANCING TODAY

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Many clients we talk to are not aware of the growing popularity of receivable finance and factoring companies—and it’s a worldwide movement, by the way.

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If anything, Canada was a bit late to the game. Business owners and financial managers often experience confusion about the differences in financing accounts receivable via the bank or a third-party commercial finance firm.

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AR financing allows companies to leverage their unpaid invoices for immediate cash flow, highlighting its strategic importance for maintaining liquidity.

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By the way, we can say somewhat ‘ tongue in cheek ‘ that one of those differences is approval. Putting aside getting approved, the real difference is how these financing company facilities work.

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WHAT IS THE DIFFERENCE BETWEEN BANK AND NON-BANK RECEIVABLE FUNDING?

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The words ‘ purchase ‘ and ‘ collateral ‘ are key to understanding the financing differences. A Canadian chartered bank takes your accounts receivable as collateral under a borrowing agreement.

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The paperwork around receivable financing states that you sell your A/R rather than collateralize it. That’s the key difference.

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An accounts receivable financing agreement (AR financing agreement) is a crucial contract detailing the obligations, advanced amounts, and collateral between a business and an AR funding lender.

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A KEY BENEFIT OF RECEIVABLES FINANCING

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One benefit of receivable services is that you can use them on an ongoing basis for all your accounts at all times, or if you choose, you can selectively use only what you need at any given time.

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In fairness, that also exists at the bank under their facility - in both cases, you only pay for what you use.

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OLD SCHOOL FACTORING REQUIRES NOTIFICATION?

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For 99% of all purchase financing of receivables, your client must be 'notified ' of the financing arrangement.

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This creates ' rough waters ' for many business owners, as they don't necessarily like the world to see how they are financing their business, much less their competitors.

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WHAT IS THE BEST TYPE OF FACTORING? IT'S CONFIDENTIAL!

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So, can the owner/manager seeking cash flow financing avoid that notification issue? The answer is a resounding ‘ YES YOU CAN ‘ - achieved via Confidential Accounts Receivable Financing.

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Accounts receivable (AR) is the money owed to businesses by customers for goods or services sold. AR financing helps companies facing cash flow issues by allowing them to leverage their outstanding invoices to obtain immediate capital.

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WHAT IS THE COST?

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How does that work, then? It's pretty basic - your firm and your firm are responsible for billing and collecting your invoices.

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Naturally, the better you are at extending credit and managing asset turnover in receivables, the lower the overall cost of this method of financing.

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(These costs can be reduced big time in other ways - including your newfound ability to take discounts with suppliers as well as the opportunity to negotiate better pricing with suppliers based on payment terms and ability)

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WHAT ARE THE QUALIFICATIONS FOR CONFIDENTIAL ACCOUNTS RECEIVABLE FINANCING SOLUTIONS

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Confidential accounts receivable financing qualifications remain the same - your customers must be inside North America.

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You must be able to produce regular financial statements. Your business must be in a steady or upward spiral as opposed to ‘ downward ‘! Financing companies provide short-term funding via a factoring solution through a simple paperwork process. Your business sells receivables as you generate sales.

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'Money owed' refers to outstanding invoices and payments due from customers for goods and services provided on credit, which are critical for managing cash flow and working capital.

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Types of Accounts Receivable Financing

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There are several types of accounts receivable financing options available, each catering to different business needs:

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1. Invoice Factoring: This involves selling an invoice to a third party, a factoring company that collects payment from the client. This method provides immediate cash but consists in notifying the customer about the arrangement.
2. Invoice Discounting: In this option, the business uses an invoice as collateral to borrow money from a lender. The business is responsible for collecting payment from the client and keeping the financing arrangement confidential.
3. Asset-Based Lending: This type of financing , aka? ' ABL ' , uses a business’s assets, such as inventory or equipment, as collateral to secure a loan. It provides flexibility in borrowing against various assets, not just invoices.
4. Accounts Receivable Loans involve borrowing money against outstanding invoices, with the lender providing cash in advance based on the invoices' value. The business repays the loan as customers settle their invoices.

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Each type of accounts receivable financing offers unique benefits, allowing businesses to choose the option that best suits their financial needs and operational preferences.

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Accounts Receivable Financing and the Balance Sheet

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Accounts receivable financing can significantly improve a business’s balance sheet. Businesses can quickly access cash by using outstanding invoices as collateral, improving their working capital.

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This influx of cash helps reduce the risk of late payments and enhances overall cash flow. Additionally, accounts receivable financing can aid in managing the debt-to-equity ratio, as it provides an alternative to traditional debt financing.

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This can improve financial health and stability, making it easier for businesses to meet their financial obligations and invest in growth opportunities.

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Case Study: The Benefits of Accounts Receivable Finance

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A growing Canadian IT service provider, landed a major government contract, excitement quickly turned to concern. The $1.2 million project required substantial upfront investment in equipment and additional staff, but payment terms stretched to 60 days after completion.

Despite having a healthy profit margin, the company lacked the working capital to fund the project's requirements. Traditional bank financing proved too slow and restrictive, putting the opportunity at risk.

Implementing accounts receivable finance transformed their situation. By financing its existing invoice portfolio, the company immediately accessed $380,000 in working capital. This allowed them to:

• Purchase necessary equipment without depleting cash reserves
• Hire five specialized technicians to support the project
• Maintain regular operations without disruption
• Complete the government project on time and within budget

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CONCLUSION

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Accounts receivables’ purchase financing of receivables makes total sense when you cannot achieve the cash flow and working capital needs via a bank or owner equity. It’s the right way to finance the balance sheet for funding you need regarding your investment in outstanding invoices.

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Call 7 Park? Avenue Financial, a trusted, credible, and experienced Canadian business financing advisor that can help you navigate rough waters in your company's accounts receivables loans financing considerations.

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FAQ

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What’s the difference between accounts receivable finance and traditional bank loans? Accounts receivable financing provides funding based on your sales rather than your credit history or collateral. Unlike loans, the funding grows with your sales and doesn’t create debt on your balance sheet, and approval depends primarily on your customers’ creditworthiness rather than your business history.

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How quickly can I access funds through accounts receivable finance? Most accounts receivable finance providers can approve applications within 1-2 business days and provide initial funding within 24-48 hours after approval. Once established, ongoing funding typically arrives within hours of invoice submission.

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Will my customers know I’m using accounts receivable financing? This depends on the specific financing arrangement. Factoring typically involves notifying customers, as they’ll make payments directly to the factoring company. However, invoice discounting usually operates confidentially, with your business collecting payments as usual.

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What percentage of my invoice value can I access immediately? Most Canadian accounts receivable finance providers advance 80-90% of invoice value upfront, with the remaining amount (minus fees) released when your customer pays the invoice in full.

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How does accounts receivable finance pricing work? Pricing typically includes a discount fee (similar to an interest rate) ranging from 1-2% per month, depending on factors like invoice volume, value, and customer credit quality.

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How does accounts receivable financing improve business growth opportunities? By converting unpaid invoices into immediate cash, your business can pursue new opportunities, accept larger orders, and invest in growth initiatives without waiting for customers to pay. This financing grows naturally with your sales volume, creating a sustainable funding source that scales with your business.

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What advantages does accounts receivable financing offer over traditional business loans? Unlike loans that increase debt and require lengthy approval processes, accounts receivable financing:

• Provides funding based on invoice quality rather than your credit history
• Creates no debt on your balance sheet
• Scales automatically with your sales growth
• Offers faster approval and funding (typically within days)
• Frees you from restrictive loan covenants and personal guarantees

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How can accounts receivable financing help manage seasonal business fluctuations? This financing solution adapts naturally to seasonal patterns by:

• Providing more funding during high-volume periods
• Reducing costs during slower seasons as fewer invoices are financed
• Eliminating the need to stockpile cash for seasonal transitions
• Creating predictable cash flow despite unpredictable sales cycles
• Supporting inventory buildup for upcoming busy periods

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Is accounts receivable finance more expensive than traditional bank financing? While the percentage rates may appear higher than bank loans, accounts receivable finance often proves more economical when considering:

• No hidden fees or administration charges
• Cost offset by improved cash flow and early payment discounts
• Reduced collection costs and bad debt expenses
• Elimination of interest on operating lines of credit
• Value of opportunities captured that would otherwise be missed

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Can accounts receivable finance help my business weather economic downturns? During economic uncertainty, this financing becomes especially valuable by:

• Maintaining cash flow despite slowing customer payments
• Reducing dependency on banks when credit tightens
• Providing capital when traditional funding sources retreat
• Offering flexibility to adapt to changing market conditions
• Creating stability during periods of economic turbulence

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What types of businesses are best suited for accounts receivable finance?

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Accounts receivable financing works best for B2B companies that invoice other businesses with payment terms. This includes manufacturers, wholesalers, distributors, staffing agencies, transportation companies, and professional services firms. The ideal candidate has profit margins sufficient to absorb financing costs while benefiting from improved cash flow. Supply chain finance facilitates early supplier payments through financial institutions, strengthening supplier relationships and optimizing financing structures.

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Does using accounts receivable finance damage my customer relationships? Modern accounts receivable finance has evolved to prioritize customer relationships through:

• Professional, courteous communication
• Transparent processes that respect your customer relationships
• Option for confidential financing where customers remain unaware
• Technology platforms that enhance rather than disrupt the payment experience
• Flexible arrangements that accommodate your relationship management preferences

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What information do I need to apply for accounts receivable finance? Preparing for application typically requires:

• Accounts receivable aging report
• Sample invoices and contracts
• Customer list with contact information
• Recent financial statements or tax returns
• Business registration documents
• Banking information
• Sales projections (for growing businesses)

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How long does an accounts receivable finance agreement typically last? Unlike fixed-term loans, most arrangements operate as renewable facilities with:

• Initial terms of 6-12 months that automatically renew
• Flexibility to increase or decrease usage as needed
• No penalties for early termination (with notice)
• Option to exit once cash flow stabilizes
• Ability to maintain the relationship for ongoing strategic advantage

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What happens if my customer doesn’t pay their invoice? The consequences depend on your specific agreement type:

• With recourse factoring, you ultimately remain responsible for unpaid invoices
• Non-recourse arrangements transfer payment risk to the finance provider
• Most agreements include a “chargeback period,” after which unpaid invoices return to you
• Some providers offer collection services to resolve payment issues
• Credit protection options may be available for an additional fee

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What industries commonly use accounts receivable finance in Canada? Accounts receivable finance serves diverse Canadian industries, including:

• Manufacturing and distribution
• Transportation and logistics
• Professional services
• Staffing and recruitment
• Construction and contracting
• Information technology
• Healthcare services

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How does accounts receivable finance impact my financial statements? The accounting treatment varies by arrangement type:

• Factoring typically appears as a sale of assets, reducing receivables
• Invoice discounting often shows as a secured loan against receivables
• Off-balance sheet structures exist that improve debt-to-asset ratios
• Proper disclosure follows specific Canadian accounting standards
• Many businesses experience improved financial ratios after implementation

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What technology innovations are changing accounts receivable finance? The industry is transforming through:

• Digital platforms connecting businesses directly to funding sources
• Automated credit scoring and approval systems
• Real-time monitoring and reporting dashboards
• Integration with accounting software for seamless processing
• Blockchain solutions for enhanced security and transparency

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MORE? INFORMATION? / CITATIONS

1. Canadian Federation of Independent Business. (2023). "Cash Flow Challenges Among Canadian SMEs." CFIB Research Report.
2. Deloitte Canada. (2022). "Alternative Financing Trends in Canadian Markets." Deloitte Financial Advisory Services.
3. Bank of Canada. (2024). "Business Outlook Survey: Financing Conditions for Small and Medium Enterprises." Quarterly Economic Review.
4. Statistics Canada. (2023). "Survey on Financing and Growth of Small and Medium Enterprises." Government of Canada.
5. Industry Canada. (2023). "The State of SME Financing in Canada." Small Business Branch Research Paper.
6. PwC Canada. (2024). "Working Capital Study: Unlocking Value in Canadian Businesses." PwC Financial Services.
7. Export Development Canada. (2023). "Trade Finance Solutions for Canadian Exporters." EDC Market Intelligence.
8. Royal Bank of Canada. (2024). "Commercial Banking Trends: Alternative Financing Growth." RBC Economic Research.
9. Factoring and Supply Chain Finance World. (2023). "Global Industry Report: North American Edition." FCI Publication.
10. Journal of Small Business Management. (2022). "Effects of Accounts Receivable Financing on Small Business Performance." Vol. 59, Issue 3.

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1. Canadian Federation of Independent Business (CFIB): https://www.cfib-fcei.ca/
2. Deloitte Canada: https://www2.deloitte.com/ca/en.html
3. Bank of Canada: https://www.bankofcanada.ca/
4. Statistics Canada: https://www.statcan.gc.ca/
5. Industry Canada (now Innovation, Science and Economic Development Canada): https://www.ic.gc.ca/
6. PwC Canada: https://www.pwc.com/ca/en.html
7. Export Development Canada (EDC): https://www.edc.ca/
8. Royal Bank of Canada (RBC): https://www.rbc.com/
9. Factoring and Supply Chain Finance World (part of FCI): https://fci.nl/
10. Journal of Small Business Management: https://www.tandfonline.com/journals/ujbm20

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' Canadian Business Financing With The Intelligent Use Of Experience '

?STAN PROKOP 7 Park Avenue Financial/Copyright/2025

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Stan Prokop is the founder of 7 Park Avenue Financial and a recognized expert on Canadian Business Financing. Since 2004 Stan has helped hundreds of small, medium and large organizations achieve the financing they need to survive and grow. He has decades of credit and lending experience working for firms such as Hewlett Packard / Cable & Wireless / Ashland Oil