If you run a Canadian business that invoices other companies, you already know the gap. You did the work in March, sent the invoice, and the payment lands in June. Meanwhile payroll, rent, and your own suppliers do not wait. Invoice factoring closes that gap by turning an unpaid invoice into cash now.
Here is the short answer. Invoice factoring is a financing arrangement where you sell your unpaid B2B invoices to a lender at a discount and receive most of the value within a day or two, instead of waiting 30, 60, or 90 days for your customer to pay. You get cash flow today; the factor collects from your customer later. It is not a loan, and it does not add debt to your balance sheet.
This guide explains how factoring actually works in Canada, what it costs, who it suits, and how it compares to a line of credit, so you can decide whether it fits your business.
How invoice factoring works
Factoring follows the same four steps almost every time, whether you factor one invoice or your whole receivables ledger.
Step one: you invoice your customer as usual. The work is done, the invoice is issued, and your customer owes you (say) $40,000 on net-60 terms.
Step two: you sell that invoice to a factor. The factor advances you a large share of the face value right away, commonly 80% to 90%. On a $40,000 invoice at an 85% advance, you receive $34,000 within a day or two, in many cases.
Step three: the factor waits to be paid. Your customer pays the invoice on its normal schedule, either to you or directly to the factor depending on the arrangement.
Step four: you get the rest, minus the fee. Once the customer pays, the factor releases the held-back portion (the reserve) and keeps its factoring fee. If the fee on that $40,000 invoice was 2.5%, you would net the remaining $6,000 minus $1,000, so $5,000 of the reserve comes back to you.
Two structures exist, and the difference matters. With recourse factoring, if your customer never pays, you have to buy the invoice back. It is cheaper because you carry the credit risk. With non-recourse factoring, the factor absorbs the loss if your customer becomes insolvent, so the fee is higher. Most Canadian small-business factoring is recourse. Read which one you are signing.
What invoice factoring costs in Canada
Factoring is not priced like a normal loan with an annual interest rate. It uses a factoring fee (sometimes called a discount rate) charged against the invoice value, usually per 30-day period the invoice stays unpaid.
Typical Canadian factoring fees run somewhere between 1.5% and 5% of the invoice value per month, depending on your volume, your customers' credit quality, and how long invoices take to clear. A business factoring $200,000 a month of strong, creditworthy receivables will pay far less than a small contractor factoring a single invoice from a slow-paying customer.
Watch for costs beyond the headline fee. Some agreements add an application or due-diligence charge, a monthly minimum volume requirement, or a wire fee on each advance. The honest way to compare offers is to ask for the all-in cost on a sample invoice paid in 45 days, then compare that dollar figure across lenders. A 2% fee with three add-ons can cost more than a 3% fee with none.
One thing factoring does not do is touch your personal credit the way a new loan application might. There is no impact to your credit to apply with Solid Capital, and the underwriting leans on your customers' ability to pay, not just your score.
A quick worked example
Say you factor a $50,000 invoice at an 85% advance and a 2.5% monthly fee, and your customer pays in 30 days. You receive $42,500 up front. When the customer pays, the factor keeps $1,250 (2.5% of $50,000) and returns the $7,500 reserve less nothing further, so you collect $6,250 of it. Total cost: $1,250 to get paid a month early on money you had already earned.
Factoring versus a business line of credit
Most owners weighing factoring are really choosing between factoring and a line of credit. They solve the same problem (cash flow gaps) in different ways, and the right pick depends on your situation.
| Feature | Invoice factoring | Business line of credit |
|---|---|---|
| What it is | Selling receivables for cash now | Revolving credit you draw against |
| Approval basis | Your customers' creditworthiness | Your business credit and revenue |
| Adds debt? | No, it is a sale of an asset | Yes, it is borrowed money |
| Cost structure | Fee per invoice, per period | Interest on the drawn balance |
| Best for | Slow-paying B2B customers, fast growth | General, flexible cash flow needs |
Factoring shines when your problem is specifically slow-paying commercial customers and your own growth is outrunning your cash. A line of credit is more flexible but usually harder to qualify for if a bank has already declined you. Honestly, if you invoice solid commercial clients and your only real constraint is the wait for payment, factoring is often the cleaner fix. You can read more in our overview of business financing options.
Is invoice factoring right for your business?
Factoring fits some businesses beautifully and suits others poorly. It works best when you sell to other businesses or governments on credit terms, your invoices are clean and undisputed, and your customers are creditworthy even if your own credit history is thin. Staffing agencies, trucking and logistics firms, manufacturers, and wholesalers use it heavily for exactly these reasons.
It fits poorly if you sell mostly to consumers (there are no commercial invoices to factor), if your invoices are frequently disputed or tied to incomplete work, or if your margins are so thin that a 2% to 4% fee erases your profit on the job. Run the fee against your margin before you commit.
Solid Capital is a Canadian alternative lender built for owners the big banks decline or under-serve. We read the full file, your bank statements, revenue, and the strength of your receivables, not just a credit score, and a Canadian advisor reviews every file personally. If a cash flow gap is the thing holding your business back, start an application. It takes about five minutes, there is no impact to your credit to apply, and you can talk through whether factoring or a different product fits before you sign anything. See exactly how that works on our process page.
The bank looks at your credit score. We look at who owes you money and how good they are for it. There is a difference.
Frequently Asked Questions
Is invoice factoring a loan?
No. Factoring is the sale of an unpaid invoice to a lender for cash now, not borrowed money. Because it is a sale of an asset, it does not add debt to your balance sheet the way a loan or line of credit does.
How fast can I get money through invoice factoring?
In many cases you receive the advance, commonly 80% to 90% of the invoice value, within one to two business days of the factor approving the invoice. The held-back reserve is released after your customer pays.
Does invoice factoring affect my credit score?
Applying does not have to. With Solid Capital there is no impact to your credit to apply. Factoring decisions lean heavily on your customers' creditworthiness rather than your personal score, which is why it suits businesses banks have declined.
What is the difference between recourse and non-recourse factoring?
With recourse factoring, you must buy the invoice back if your customer never pays, so it costs less. With non-recourse factoring, the factor absorbs the loss if your customer becomes insolvent, so the fee is higher. Most Canadian small-business factoring is recourse.
How much does invoice factoring cost in Canada?
Factoring fees typically range from about 1.5% to 5% of the invoice value per 30-day period, depending on your volume, your customers' credit quality, and how long invoices take to clear. Always compare the all-in cost on a sample invoice, including any add-on fees.
