Factoring financing has been gaining popularity across Canada as a solution to finance companies that need to improve their cash flow. However, Québec is a unique market when it comes to factoring. This is due to the process the factor must follow to secure the accounts receivable and the need for bilingual personnel. As a result, you must select your financing provider carefully. This article helps you understand the best process to find and choose a factoring company in Québec.
Is factoring right for your company?
Before starting the evaluation process, determine if factoring is the right solution for your company. Although factoring is flexible, it can only help companies that have:
- Creditworthy commercial clients
- Invoices due in 30 to 60 days
- High profit margins (20% or more)
- Cash flow issues due to slow-paying clients
If your company meets these criteria, then factoring your invoices may be the right choice. To learn more, read “What is Factoring?” and “How Does Invoice Factoring Work?”
The selection process
Finding the right factoring company for your business takes some diligence, but it’s worth the effort. You must develop a list of candidates, interview them, determine if they meet your criteria, and compare proposals before making a decision.
Step #1: Find candidates
Developing a list of factoring companies should be straightforward. You can:
- Search the Internet
- Ask your accountant or other colleagues
Note that several finance companies can work with Canadian businesses but cannot support companies based in Québec. Mention your location early in the conversation to ensure you get only those factors that can work with companies that provide services in the province.
Step #2: Evaluate the factoring companies
Once you have built a list of companies, start interviewing them. Develop a standard set of questions that you can ask every company. These questions will ensure you make accurate comparisons between providers. The following list identifies the types of questions you should ask prospective factoring companies.
a) How long have they been in business?
The factoring industry has been growing quickly. You want to work with a company that has been in business for a while – ideally five years or more. If the company is new, inquire about its executives and their backgrounds. Focus on companies whose executives have been in the industry for a long time.
b) Do they have a local office?
You will likely be better off working with a factoring company with an office in Canada. Ideally, you want the company to have an office in Québec that is staffed with bilingual employees.
Be careful about working with factoring companies that don’t have a base of operations in Canada unless they have substantial experience in Québec. There are significant differences between how factoring works in Québec, and how it works in other provinces. For example, assets in most provinces are secured using the Personal Property Security Act (PPSA). Québec, on the other hand, uses the hypothèque. Working with someone who is not aware of these differences causes delays and unnecessary problems.
c) In which industries do they specialize?
Most factoring companies describe themselves as generalists who can work in any industry. However, many factors have industry specializations. Ask if they have experience in your industry, and verify by asking industry-specific questions.
d) In what size company do they specialize?
Most factoring companies advertise that they can work with a wide range of company sizes. However, factors often have a preferred size range. Ask about the factoring company’s preferred size range and consider working with a company that is comfortable with your amount of invoicing.
e) What is their fee structure?
This question is fairly straightforward. Ask them to provide an estimate of costs and a proposed fee structure.
f) What are the due diligence costs?
Ask if they have due diligence costs or application fees. In some cases, these costs can be substantial. Be sure that you understand these costs.
Step #3: Compare their proposals
Once you have selected the factoring companies of interest, ask them to submit proposals. Comparing factoring proposals can be challenging since factors often use different fee structures.
Focusing on the factoring rate alone can be misleading. Instead, focus on the “cost per dollar.” You calculate this figure by dividing the factoring rate for similar periods by the advance rate. In our opinion, the cost per dollar allows for a more meaningful comparison between factoring companies.
Step #4: Make a selection
Once you have compared the factoring proposals, select the finance company that best fits your needs. One of the biggest mistakes companies make when selecting a factoring company is focusing only on the rates/cost. Cost of service is an important criterion of the decision, but not the only one. There are other criteria that are just as important:
- Cost
- Industry specialization
- Longevity
- Client base
- Level of service
- Additional benefits/ offerings
Ultimately, you must ask yourself if your business will be better off by working with your chosen finance company.
Looking for a factoring company?
If you are looking for a factoring company, consider working with us. If you would like a quote, call us toll-free at (877) 300 3258 or fill out this form.