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SME Financing in Canada, 2002 — Part I: Other Sources of Financing

Factoring

Factoring is the sale of accounts receivable, at a discount, to a third party. When a firm provides another with goods on a promise to pay in a period of time it essentially extending supplier credit and creating an "account receivable" at a later date. As we have seen that is a very common form of informal financial arrangement. When the supplier wants to realize immediately the value of its receivables rather than waiting for them to be paid by her or his customer, he or she will sell the account receivable to the factor. This kind of a sale usually leaves the seller with a percentage of the value of the receivable, to compensate the factor for the risk of not collecting on the receivables.

In 2000, only 0.4 percent of Canadian SMEs used factoring. It appears that the factoring activities of Canadian financial institutions tend not to be reported separately. The market for factoring appears to be much more developed in the U.S. than in Canada. Given the very small number of observations, any conclusions about the Canadian factoring market are tentative and preliminary. Following are some findings concerning the factoring market in 2000:

• Size of SME: Factoring is a slightly more common for larger SMEs than for smaller ones.
  
  
• Sectors: factoring is slightly more common in manufacturing, wholesale/retail, and KBI, with 0.6 percent of SMEs in each of these industries using factoring in 2000.
  
  
• Regional usage: Factoring was used by 1 percent of SMEs in the region of British Columbia and the Yukon. This figure is higher than in all other regions, where SMEs using factoring varied between 0.1 percent and 0.4 percent.
  
  
• Exporters: SMEs that export used factoring more often than non-exporters – 1.5 percent compared to 0.2 percent. This is most likely due to the nature of work that exporting SMEs tend to do (i.e. goods producing).
  
  
• Urban SMEs: were more likely to use factoring than rural SMEs in 2000 – 0.5 percent versus 0.1 percent.

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