The global invoice factoring market was valued at more than USD $3.5 trillion in national receivable volume between 2022 and 2024. Considering this astronomical figure, it isn’t a huge leap to conclude that many companies in Canada rely on this type of financing, especially since North America accounts for a considerable share of global activity.
However, even though invoice factoring in Canada is a popular form of financing, when companies can’t afford to wait 60-plus days, what exactly… is it? Well, Today our team at Bizfund is going to explain the ins and outs of invoice factoring for a small business in Canada.
This should help you understand if it’s a cash flow tool that can work well for your business. But before we get into things, just remember that invoice factoring isn’t a last-resort option, and that if it isn’t a great fit, there are always other solutions like merchant cash advances.
What Is Invoice Factoring?
Firstly, if you’re looking for accounts receivable financing in Canada, you shouldn’t be considering invoice factoring. These two types of financing are not the same thing. Their core difference is that with accounts receivable financing, you borrow against unpaid invoices, while with invoice factoring, you sell invoices to a third-party factoring company or select banks.
With this in mind, when you sell your invoices to a factoring company, you’ll receive an upfront cash advance. The confusion arises because the BDC defines factoring as selling accounts receivable for immediate funds. However, since they are not the same, let’s look at an example to put it into perspective.
Put yourself in this scenario. You are a construction subcontractor in Ontario. You invoice the general contractor for $80,000 after completing the electrical work. Unfortunately, the GC may not pay for 45 days, and you cannot wait that long. You have bills to pay and need that money. In this scenario, you would consider consulting a factoring company. Depending on your circumstances, they may advance you 85% of the invoice or $68,000 within a few days.
This is hugely beneficial, but it’s not free money by any means. This is because once the GC pays the invoice, the factor business sends the remaining balance to you, but deducts their fee, which can be quite significant. So there it is. You get money faster, but you give up part of your invoice value.
How Invoice Factoring Works in Canada
Even with an example, it can be challenging to fully understand how invoice factoring works. That’s why we share insight into the process:
- You’ll issue an invoice to a creditworthy business customer.
- If the customer will take too long to pay, submit the invoice to a factoring company for review.
- The factor will verify the invoice and check the customer’s payment risk.
- If the factor believes the risk is low, they will pay, you an advance, often 75% to 90% of the invoice value.
- After the customer pays the factor, you will receive the balance after the factor deducts its fees.
Recourse vs Non-Recourse Factoring
Within the factoring space, there is also a difference between recourse and non-recourse factoring. With recourse factoring, your business will remain responsible for the funds you receive in advance if the customer doesn’t pay. In these situations, the factor company can require you to repay the advance, replace the invoice, or cover the losses.
On the other hand, non-recourse factoring is a form in which the factor assumes more of the credit risk. However, this is done only under the terms of the agreement. Non-recourse factoring often costs more and may only protect you if the customer becomes insolvent. It won’t work if there is a dispute over the work or the invoice. It’s also worth noting that non-recourse terms aren’t universally defined, so the agreement matters more than the label.
For most small businesses, this is where the fine print becomes real. We urge you to ask what happens if your customer pays late, disputes the invoice, or refuses payment. Once you have answers to these questions, you can then decide.
The Invoice Factoring Decision Matrix
If you’re unsure whether invoice factoring is a good decision for your business and want to explore your options, you may want to look at the table below. This table compares invoice factoring with merchant cash advances and traditional lines of credit.
| Decision Criteria | Invoice Factoring | Merchant Cash Advance | Traditional Line Of Credit |
| Speed Of Access | Often 3 to 7 business days for first funding, faster after setup | Often fast once revenue is verified | Slower approval, especially through banks |
| Cost | Usually fee-based, often 1.5% to 4% per 30 days | Often higher, often factor-rate based | Typically lower for qualified borrowers |
| Customer Impact | The customer may know if notification factoring is used | No direct customer involvement | No customer involvement |
| Eligibility | Based heavily on customer invoice quality | Based on card sales or deposits | Based on credit, financials, and bank criteria |
| Repayment Structure | Customer invoice payment repays the factor | Repaid from future sales | Borrower repays the drawn balance with interest |
Typical Costs and Rates in Canada
It’s only logical to consider typical costs and rates in Canada before undertaking invoice factoring as a solution. Firstly, Canadian factoring costs vary by invoice size, customer quality, industry, monthly volume, and the length of time the invoice remains unpaid.
However, as a working range, many Canadian businesses should expect advance rates around 75% to 90% and factoring fees between 1.5% and 4% per 30 days. However, lower-risk invoices from trustworthy customers usually cost less. Likewise, smaller invoices, slower-paying customers, or riskier industries typically cost more.
It’s also important to remember to ask about application fees, minimum monthly volume, wire fees, termination fees, reserve holdbacks, and whether the rate increases after 30, 45, or 60 days. This is where costs can really start to add up.
Industries Where Factoring Works Best
Naturally, there are industries where factoring is a better choice than other funding alternatives. In our experience, factoring often works well for B2B businesses that invoice other businesses or public sector buyers. Here’s a look at our insights:
- Construction: Before they are paid by a GC, subcontractors must pay for labour and materials in most cases. Although prompt payment laws can help, like Alberta’s payment rules that require owners to pay contractors within 28 calendar days after receiving a proper invoice, timing pressure still exists.
- Staffing: With the staffing industry, payroll arrives weekly or biweekly, while client invoices may be paid later. This can become a huge problem when there are cash flow issues.
- Transport: Carriers deal with fuel, maintenance, insurance, and driver costs before invoices are cleared. So, to carry on with their business, those in transportation often have to explore funding solutions to manage cash flow.
In the cases above, factoring can often better match the type of cash flow problem than a term loan.
The Customer Relationship Question
Unfortunately, factoring can negatively affect your customer relationships. This is because some arrangements require your customer to pay the factor directly. This is known as notification factoring. However, this form of invoice factoring in Canada isn’t always a problem.
There are some larger customers, GC’s, manufacturers, and logistics clients who are used to factoring. Still, it can feel awkward if the relationship is new or if the customer thinks factoring means your business is in trouble.
For this reason, many businesses with an interest in invoice factoring will choose non-notification factoring to keep the arrangement less visible. But…and yes, there is a but… it can cost more and be harder to qualify for. So, before you sign an agreement with a factoring company in Canada, ask how they handle collections. In addition, ask what tone the factor will use with your customers, too.
When NOT to Use Invoice Factoring
We understand that this might not be what you want to hear right now, but factoring isn’t a fit for every business, as you’ve likely deduced for yourself. If you sell mostly to consumers, have few invoice-based sales, or issue invoices that customers often dispute, it usually will not be feasible.
Additionally, it may also be too expensive if your margins are thin. For example, if you make 8% margin on a job and factoring costs 4% for the collection period, the cash flow relief may eat too much of your profits. You should also be cautious if your customer concentration is high. If one customer accounts for most of your receivables, the factor may limit the advance or charge a higher fee.
Invoice Factoring In Canada: One Tool In A Financing Toolkit
There’s no denying that invoice factoring is a good option for some businesses. This is especially true if your company has many invoices but cannot wait weeks for payment. However, it isn’t the only option.
For some, a line of credit may be cheaper, especially for established businesses. Then, for others who have strong card sales but few invoices, a merchant cash advance may be a better fit. So, at the end of the day, the choice is yours.
But if you want to learn more about merchant cash advances, contact us at Bizfund today. We can help you determine if we’re a fit for your funding needs.
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