Invoice factoring in Canada: how it works and what it costs

Invoice factoring turns unpaid invoices into cash now. You do the work, send the invoice, and instead of waiting thirty, sixty or ninety days for your customer to pay, a factoring company pays you most of it today.

It is common in trucking, staffing, manufacturing and wholesale — anywhere the work is done long before the money arrives.

How factoring works

1. You invoice your customer as normal.
2. You sell that invoice to a factoring company.
3. The factor advances you most of its value, usually within a day or two.
4. Your customer pays the factor when the invoice is due.
5. The factor pays you the rest, minus its fee.

The advance is often somewhere around 80% to 90% of the invoice. The remainder, the reserve, comes back when your customer pays.

What it costs

The fee is usually a percentage of the invoice, charged per period the invoice is outstanding — for example, a percentage for the first thirty days and more for each week or ten days after that.

That structure matters. A fee that looks small per month becomes a large one if your customers routinely pay late, because the clock keeps running. Before you sign, ask:

• What is the fee on a typical invoice if it pays on time, and if it pays thirty days late?
• Are there other charges — setup, per-invoice, account maintenance, minimum volume?
• Is it a contract for a fixed term, and what does it cost to leave?

Then work out the total in dollars on a real month of your invoices. What working capital costs shows how to compare that with other offers.

Recourse and non-recourse

Recourse factoring means that if your customer does not pay, you buy the invoice back. It is cheaper, because you keep the credit risk.

Non-recourse factoring means the factor absorbs the loss if your customer cannot pay — usually only for specific reasons, such as insolvency, and not for a dispute about the work. It costs more. Read exactly what it covers.

Notification: will your customers know?

In most factoring, yes. Your customer is told to pay the factor rather than you, and the invoice carries the factor's payment details. Some businesses mind this and some do not; in trucking it is so common that nobody notices.

If you would rather your customers never know, that is one of the main reasons to look at borrowing against receivables instead.

Factoring or borrowing against your receivables

Factoring sells the invoice. Asset-based lending borrows against it.

With an asset-based facility, your receivables secure a line of credit. You keep collecting from your customers as normal, you draw what you need, and the limit follows the size of your receivables ledger. In most structures your customers notice nothing.

• Factoring suits a younger business, a business with a few large customers whose credit is better than its own, or one that wants the collections handled.
• Borrowing against receivables suits a business with a steady ledger that wants to keep its customer relationships, and usually costs less once it is in place — in exchange for more paperwork to set it up.

Asset-based lending is one of the four products we place. Factoring is not — but if you already factor, that is normal and it does not stop a file. Say so at the start: the same invoice cannot be pledged twice, and a lender needs to know which ones are already assigned. Financing for trucking companies covers this in detail.

Before you factor, ask one question

Is the problem that your customers pay slowly, or that you do not have enough margin? Factoring solves the first. It makes the second worse, because the fee comes out of the margin you are short of.

If it is timing, and your receivables are real, asset-based lending or a line of credit may do the same job for less.