Picture a trucking company with a problem that has nothing to do with demand. Work is steady, invoices go out every week, and none of it matters because the biggest client pays on 60-day terms, while drivers and fuel suppliers need paying weekly. That gap, between doing the work and getting paid for it, is the entire reason invoice factoring exists.
What invoice factoring actually is
Invoice factoring is the sale of an unpaid invoice to a third party, called a factor, in exchange for cash now instead of cash in 30, 60 or 90 days. In a typical factoring arrangement, you’re selling the receivable rather than taking out a conventional loan against it. You’re not borrowing against the invoice; you’re selling it. That distinction matters because the factor is purchasing the receivable rather than simply lending you money against it, both for how it shows up on your books and for what the factor is actually evaluating when they decide whether to work with you.
Here’s roughly how it runs. You invoice a customer for work already completed or goods already delivered. Instead of waiting on that customer to pay, you sell the invoice to a factoring company, which advances you a portion of its value, advance rates generally in the 70% to 95% range, within a day or two. The factor then collects the full amount directly from your customer when it’s due. Once they’ve been paid, they send you the rest, minus their fee.
Recourse versus non-recourse, and why it matters
Most factoring arrangements in Canada are recourse factoring, which means if your customer never pays the invoice, you’re on the hook to buy it back or cover the loss. Non-recourse factoring shifts that credit risk onto the factor instead, but it costs more, since the factor is now the one taking the bet on whether your customer is good for it. Recourse factoring is often less expensive than non-recourse factoring because the business retains more of the customer’s credit risk.
This is worth understanding before you sign anything, because a factoring agreement that looks cheap on the surface can turn expensive fast if a client goes under and you’re still contractually required to make the factor whole.
What it actually costs
The fee side varies a fair amount by provider, invoice volume, and how creditworthy your customers are, not how creditworthy you are, which is one of the more useful things about this type of financing for newer businesses without a long credit history of their own. The customer’s creditworthiness is an important part of the underwriting because the factor ultimately expects the customer to pay the invoice. The factor may also review the business selling the invoices, its financial position, and the quality of its receivables.
Fees are usually charged as a percentage of the invoice, and the total cost climbs the longer the invoice takes to get paid. An invoice collected in 30 days costs meaningfully less than one that drags on for 90, so factoring rewards businesses with customers who actually pay on time, or close to it, even if the business itself is cash-strapped in the meantime.
Who actually uses this
Factoring tends to concentrate in industries where the work happens well before the payment does. Manufacturing, mining and transportation are the classic examples, trucking especially, since a fleet has fuel and driver costs due immediately regardless of when the shipper settles the invoice. Staffing agencies lean on it heavily too, because payroll runs weekly or biweekly while client invoices often sit on 30 or 45-day terms. If your business sends invoices to other businesses and waits weeks to get paid, you’re probably in the pool of companies this makes sense for. If you sell directly to consumers who pay at the point of sale, it almost never applies.
Where it beats a loan, and where it doesn’t
Factoring approval leans on your customers’ credit, not yours, which makes it accessible to businesses that wouldn’t clear the bar for a term loan or a traditional line of credit. Because factoring involves selling receivables rather than taking a conventional loan, its accounting treatment can differ from traditional debt financing. Businesses should confirm the treatment with their accountant based on the specific agreement.
The trade-off is cost. Factoring is generally more expensive than a bank line of credit over the same period, which is the price of speed and flexible underwriting. It’s also not a fit if your margins are thin enough that giving up a slice of every invoice erodes profitability past the point of making sense. And depending on the arrangement, your customer may end up paying the factor directly rather than you, which some businesses are comfortable with and others aren’t, worth asking about upfront rather than discovering after the agreement’s signed.
For businesses whose cash flow problem isn’t unpaid invoices specifically, say, needing capital for equipment or a lump sum for expansion, a merchant cash advance or term loan is usually a more natural fit than factoring.
Choosing a factoring provider
Read the contract for the advance rate, the fee structure, whether it’s recourse or non-recourse, and whether there’s a minimum monthly volume you’re committing to. Some providers lock you into factoring all your invoices rather than letting you pick and choose which ones to sell, which matters if you only want to smooth out cash flow on a handful of slow-paying clients rather than your entire receivables book.
At Service Capital, our AR financing programme covers both recourse and non-recourse arrangements, with advance rates generally in the 70% to 95% range depending on your customers’ payment history. If unpaid invoices are the thing standing between your business and its next payroll run, apply now or get in touch and we’ll walk you through the terms honestly before you commit to anything.
