Insights 2016


Charan Kumar & Bryan A. Tannenbaum:
Resourcefulness key to finance deal between Indian and Canadian companies

  

How a “let’s make it work” culture
helps build a strong financial outcome

Knowing how to access cash to fund operations quickly is a key business skill, and even more important in today’s global business environment. Many businesses are finding that financial practices that work in one part of the world do not necessarily work in another.

One example of this is the raising cash through factoring – the use of invoices or accounts receivable as collateral for a loan. While this way to access cash avoids the ownership dilution that comes from equity financing, and the balance sheet impacts of finance through debt, it has its own challenges. That’s particularly the case when a company in India seeks to raise cash in Canadian markets.

Canada has long been an attractive source of financing for global investors. This is partly because of the country’s advanced and well-operated financial services sector, and also because of its strong reputation for transparency and financial regulation.

To understand how international companies can access Canadian finance through factoring, it helps to know how a factoring deal is structured -- which depends on the countries involved in the transaction.

There are several key players that make international factoring happen. These include the Funder, who factors the transaction; the Customer, whose accounts receivable are being factored; the Advisor, who interfaces between the Funder and the Customer; and the Trustee, who administers or oversee the transaction from the disbursement through to its repayment.

Points to consider while factoring international accounts receivable

  1. Validation of customers: Funders seek assurance that the customers represented by the invoices are genuine and of repute. Some countries have rating agencies similar to Dunn & Bradstreet, and these can be a great help. However, some countries do not yet have mature and reliable ratings agencies. In such cases, the advisor’s international presence helps fill the gap, often through local inquiry.
  2. Validation of Invoices: Validating that the invoices are genuine and collectable is the second important point that the Funders consider.
  3. Collections:Funders also take into consideration the quality of the collections process, should there be a default. They consider the availability of judicial and other options for recovery of the monies, and the cost of such recovery.
  4. Trustee operations: Availability of a law firm goes a long way in ensuring that the processes of funds disbursement and its collections are streamlined and enforced. This is especially true if they have an office in the country of origin of funds and the country where the customer entity operates.
  5. Foreign Exchange Risks: The currency of funding plays an important role in determining the factoring or discounting rates, and any other incidental costs involved. Using the right currency, and the hedging strategies used by the customer to manage forex risks, influence the funder.

Flexibility is key in international factoring:  

One of the major success factors in international factoring is working with business partners who are flexible and willing to try new ideas. There must be a culture that rather than saying “no” to an unfamiliar proposal, will be willing to say “Let’s find a way to make this happen.”  

This includes being willing to do business long-distance, and work with local partners to help assess the risk factor that comes with each invoice. As Harry Blum, Managing Partner for Collins Barrow Toronto says, “Engaging the right advisor can make all the difference.”

Charan Kumar CIA, CISA, CGEIT, CFE is a partner in the Enterprise Governance practice of Collins Barrow Toronto LLP and can be reached at ckumar@collinsbarrow.com

Bryan A. Tannenbaum, FCPA, FCA, FCIRP is the President of Collins Barrow Toronto Limited and can be reached at btannenbaum@collinsbarrow.com

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