A trucking company in Brampton hauls a $60,000 load for a national grocery chain, sends the invoice, and waits. Net 60 terms. Payroll lands every second Friday, and the fuel card doesn't wait either. That gap between work delivered and cash received is the exact problem invoice factoring was built to close.
Invoice factoring in Canada is the sale of your unpaid B2B invoices to a factoring company in exchange for immediate cash. The factor advances 75% to 90% of the invoice value upfront, often within 24 to 48 hours once your account is set up. When your customer pays the invoice, the factor releases the remainder to you, minus a fee. It's not a loan. You're converting money you've already earned into money you can actually spend. That's why factoring has become a core business financing tool for Canadian companies stuck with slow-paying customers.
Here's how the whole thing works, what it really costs, and when a different product makes more sense.
How invoice factoring works in Canada
The mechanics are simpler than most owners expect. Four steps, start to finish.
The 4-Step Factoring Cycle
- You deliver and invoice. You complete work for another business or a government buyer and issue an invoice on net 30, 60, or 90 terms.
- You sell the invoice. The factoring company verifies the invoice is real, undisputed, and free of liens, then advances you 75% to 90% of its face value.
- Your customer pays the factor. When the invoice comes due, your customer pays the factoring company directly.
- You receive the reserve. The factor releases the held-back portion to you, minus its fee.
Two contract details decide how much risk you keep. With recourse factoring, the most common structure in Canada, you must buy back any invoice your customer fails to pay. Non-recourse factoring shifts specified credit losses to the factor, and you pay a higher fee for that protection. Read which one you're signing. The word "recourse" buried on page six changes everything about a bad month.
There's also the question of who knows. Standard notification factoring means your customer is told to remit payment to the factor. Confidential factoring keeps the arrangement invisible and leaves collections with you, but it usually costs more and is reserved for stronger files.
Notice what the factor is actually underwriting: your customer's ability to pay, not your credit score. It's the same logic behind what alternative lenders look at instead of your credit score. For an owner who's been declined by two banks, that flip is the whole point.
What invoice factoring costs
Most Canadian factoring companies charge a discount fee of roughly 1% to 2% of the invoice value for every 30 days the invoice stays unpaid. Smaller files, riskier customers, and non-recourse protection all push that number up.
Run the math on a real file. Say you factor a $50,000 invoice at an 85% advance and a 1.5% fee per 30 days:
- Day one: you receive $42,500 (85% of $50,000)
- Day 45: your customer pays the factor in full
- Fee: 45 days at 1.5% per 30 days works out to 2.25%, or $1,125
- Reserve released: $7,500 held back, minus the $1,125 fee, so $6,375 lands in your account
Total received: $48,875 on a $50,000 invoice, with $42,500 of it available six weeks early. Whether that trade makes sense depends entirely on your margin and what the cash lets you do. A 2.25% cost to take a contract you'd otherwise have to turn down is cheap. The same 2.25% on work you're already barely profitable on is not.
Honestly, if your gross margin is under 10%, factoring every invoice you issue isn't a strategy. It's a slow leak.
Watch the contract for costs beyond the discount fee: setup charges, monthly minimum volumes, per-invoice administration fees, and termination penalties on multi-year agreements. Factoring fees also don't float with the Bank of Canada policy rate the way a bank line of credit does, so your cost stays predictable even when rate announcements don't. Price the full agreement, not the headline number. That's where the real comparison lives.
How factoring compares to loans, lines of credit, and MCAs
Factoring solves one specific problem: cash trapped in receivables. Other products solve different problems, and picking the wrong tool costs real money.
| Product | Approval is based on | Typical speed | How it's repaid | Best fit |
|---|---|---|---|---|
| Invoice factoring | Your customers' credit and invoice quality | 24 to 48 hours after setup | Customer pays the factor | B2B firms on net 30 to 90 terms |
| Business term loan | Revenue, bank statements, credit profile | A few business days | Fixed scheduled payments | Planned one-time investments |
| Line of credit | Revenue history and credit profile | Days to set up, instant to draw | Revolving, interest on what you use | Recurring short cash gaps |
| Merchant cash advance | Daily card and deposit volume | 24 to 48 hours in many cases | Percentage of daily deposits | Retail and hospitality with card sales |
The dividing line is where your cash problem comes from. If it comes from customers who pay in 60 days, factoring attacks the cause directly and grows with your sales. If it comes from a one-time purchase or a seasonal dip, a term loan or line of credit is usually cheaper. And if your revenue runs through a card terminal rather than invoices, the comparison shifts to a merchant cash advance versus a business loan instead.
One more distinction worth naming: factoring adds no debt to your balance sheet, because you're selling an asset rather than borrowing against it. For a company already carrying a loan, or one planning to apply for a business loan with bruised credit later, that's not a footnote. It's a reason to choose it.
Who qualifies and the mistakes to avoid
Factoring approval hinges on four things. You invoice other businesses or government buyers (consumer invoices don't qualify). Your customers have solid payment histories. Your invoices are clean, with no disputes or prior liens. And your margins can absorb the fee. Time in business and your personal credit score matter far less than they would at a bank, which is why startups with one strong anchor customer regularly qualify.
One uniquely Canadian wrinkle: unremitted GST/HST or payroll source deductions owed to the Canada Revenue Agency create a deemed trust that ranks ahead of the factor's claim on your receivables. Disclose any CRA arrears before you sign, not after. Factors find out anyway, and a surprise lien mid-agreement is how facilities get frozen.
The mistakes we see most often:
- Factoring low-margin work by habit instead of factoring selectively when the cash creates value
- Signing multi-year agreements with monthly minimums a seasonal business can't sustain
- Staying quiet about a customer dispute, which stalls verification and freezes the advance
- Letting one customer make up most of your receivables, since concentration caps how much a factor will fund
Every one of these is avoidable with a careful read of the agreement and an honest conversation about your book of customers before you commit.
Solid Capital is a Canadian alternative lender built for exactly this situation: business owners and homeowners the big banks have declined or under-served. Our underwriting reads the full file: your invoices, bank statements, revenue history, and business context, not just your credit score. That applies across invoice factoring, term loans, merchant cash advances, and private mortgages. If waiting 60 days to get paid is choking your growth, start an application with Solid Capital. The form takes about five minutes, there's no impact to your credit to apply, and a Canadian advisor reviews every file personally.
Your invoices are money you've already earned. The only open question is when you get to use it.
Frequently Asked Questions
Is invoice factoring a loan?
No. Factoring is the sale of an asset, your accounts receivable, rather than borrowing. That means no fixed monthly payments and no new debt on your balance sheet, though recourse agreements can require you to buy back invoices your customer never pays.
How much does invoice factoring cost in Canada?
Most Canadian factors charge roughly 1% to 2% of the invoice value for every 30 days the invoice remains unpaid, with advance rates of 75% to 90%. Smaller files, riskier customers, and non-recourse coverage push fees higher, so price the full agreement, not just the headline rate.
Will my customers know I'm using a factoring company?
Usually, yes. In standard notification factoring, your customer is directed to pay the factor. Confidential factoring keeps the arrangement private and leaves collections with you, but it typically costs more and is reserved for stronger files.
What is the difference between invoice factoring and invoice financing?
Factoring sells the invoice to the factor, who then collects from your customer. Invoice financing borrows against the invoice while you keep ownership and keep collecting. Financing preserves the customer relationship. Factoring hands off the collections work.
Can you qualify for invoice factoring with bad credit?
In many cases, yes. Factors underwrite your customers' ability to pay far more than your own credit score, which is why factoring works for newer businesses and owners rebuilding credit. Clean invoices and creditworthy customers matter more than your beacon score.
