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WHAT IS ACCOUNTS RECEIVABLE FACTORING?

TABLE OF CONTENTS

What Is Accounts Receivable Factoring?

How Does Factoring Work?

What Does Accounts Receivable Factoring Cost in Canada?

What Is the Best Type of Factoring Facility?

A Closer Look at Factoring Rates

Other Factors That Affect A/R Financing Pricing

Key Issues to Consider in Accounts Receivable Factoring

Conclusion

Accounts receivable factoring is a straightforward way to finance working capital. As you generate sales and issue invoices, a factoring company purchases those invoices under a formal agreement.

Both product-based and service businesses can use receivable financing. This makes factoring one of the most flexible business funding solutions in Canada.

HOW DOES FACTORING WORK?

Once invoices are issued, the factor advances cash against approved receivables. Funding typically occurs the same day or within 24 hours.

When your customer pays the invoice, the remaining balance is released to you, minus the factoring fee.

WHAT DOES ACCOUNTS RECEIVABLE FACTORING COST IN CANADA?

In Canada, factoring costs usually range from 1.5% to 2.0% per month. This is a fee, not an interest rate.

Rates vary based on deal structure, customer credit quality, and invoice volume. Factoring fees are often misunderstood, making education critical.

WHAT IS THE BEST TYPE OF FACTORING FACILITY?

Most Canadian factoring facilities require customers to pay the factor directly. While common, this structure is not ideal for every business.

A confidential receivable financing facility allows you to bill and collect your own accounts receivable. This structure preserves customer relationships and operational control.

A CLOSER LOOK AT FACTORING RATES

Factoring rates are influenced by the size of your receivables portfolio. Importantly, you are not always required to factor all invoices.

You choose when and how much to finance. This means you only pay for the funding you use, making factoring a strong alternative to a traditional line of credit.

OTHER FACTORS THAT AFFECT A/R FINANCING PRICING

Additional pricing factors include customer credit quality, invoice frequency, and average invoice size. Your company’s financial stability and reputation also matter.

In most cases, unless a business is in severe distress, receivable financing remains accessible. This is why factoring is often used when bank financing is unavailable.

KEY ISSUES IN FACTORING AR

Issue 1: Advance Rates and True Cash Availability

Factoring companies typically advance 70–90% of invoice face value immediately, holding the remaining 10–30% as a reserve until your customer pays. A $100,000 invoice at 85% advance rate gives you $85,000 upfront, with the remaining $15,000 (minus fees) released after customer payment.

Real-World Example: A Toronto manufacturing company factored $250,000 in monthly invoices at an 80% advance rate. They received $200,000 immediately but expected the full reserve back. When customers paid, they discovered verification fees, wire transfer charges, and administration costs reduced their $50,000 reserve to $43,500. The effective advance rate was actually 77.4%, creating a $6,500 cash flow shortfall in their planning.

Short-Term Impact: Immediate working capital shortfalls if you budget based on stated advance rates without accounting for ancillary fees.

Long-Term Impact: Chronic cash flow miscalculations that force you to factor more invoices than necessary, compounding costs over time.

Issue 2: Recourse vs. Non-Recourse Structures

Recourse factoring means you’re responsible if your customer doesn’t pay — the factor can charge back the advance to your account. Non-recourse factoring transfers credit risk to the factor, but costs 0.5–2% more and includes coverage limitations.

Real-World Example: A Vancouver distribution company used recourse factoring for a $180,000 invoice to a retail customer. When that customer filed for bankruptcy protection 45 days later, the factoring company withdrew $180,000 from the distributor’s account, creating an immediate crisis. The distributor had already spent the funds on inventory and payroll, forcing them to seek emergency bridge financing at 24% annual interest to cover the chargeback.

Short-Term Impact: Unexpected cash withdrawals that can bounce other payments and damage your banking relationships.

Long-Term Impact: Accumulating bad debt exposure that defeats the primary purpose of using factoring for cash flow stability.

KEY ISSUES TO CONSIDER IN ACCOUNTS RECEIVABLE FACTORING

When evaluating A/R financing, experienced advisors focus on several core issues. Understanding these factors leads to better pricing and stronger cash flow outcomes.

The nine key issues include:

Benefits of factoring and accounts receivable financing

The value of an advisor or financing consultant

Understanding factoring fees and cost structures

Due diligence requirements and owner credit history

Cash-flow optimization strategies using invoice factoring

Increased capacity to take on larger contracts

Common misconceptions about factoring

Accounting and banking considerations

Recourse vs. non-recourse factoring

CASE STUDY: FACTORING A/R FOR A CANADIAN DISTRIBUTION COMPANY

From The 7 Park Avenue Financial Client Files

Company

ABC Company, a wholesale industrial supplies distributor serving manufacturers across Ontario.

Challenge

ABC Company secured new contracts that would increase monthly revenue from $180,000 to $425,000. Customer payment terms were net 60, while suppliers required payment within 15 days.

The company’s $75,000 bank line of credit was fully utilized, and the bank declined an increase due to limited operating history and leverage ratios.

Solution

ABC implemented a factoring A/R facility with an 85% advance rate on approved invoices. By factoring $425,000 in monthly receivables, the company accessed $361,250 in immediate working capital.

The facility included non-recourse protection, no monthly minimums during the trial period, and support for credit checks and collections.

Results

Within six months, monthly revenue grew to $520,000. Factoring A/R enabled ABC Company to:

Improve gross margins by 3.2% through early supplier payment discounts

Eliminate $31,000 in lost sales caused by prior cash flow constraints

Protect $890,000 in receivables with non-recourse coverage

Reduce administrative burden by outsourcing collections

Preserve bank credit for equipment and seasonal inventory

Long-Term Impact

After 14 months, stronger financials qualified ABC Company for expanded bank financing. The company retained selective factoring for longer-term invoices while shifting short-term receivables to its bank line, optimizing total financing costs.

KEY TAKEAWAYS

Accounts receivable factoring converts unpaid invoices into immediate cash

Canadian factoring fees typically range from 1.5%–2.0% per month

Confidential receivable financing preserves customer relationships

Businesses can choose which invoices to finance

Factoring is a viable alternative when bank credit is unavailable

Advisor expertise significantly impacts pricing and structure

CONCLUSION

Is Factoring AR Right for Your Business?

You might benefit from factoring AR if you:

✓ Invoice business customers (B2B) with 30–90 day payment terms ✓ Have orders you can’t accept due to cash flow limitations ✓ Need working capital within 24–48 hours, not weeks ✓ Want financing that grows automatically with your sales ✓ Have been declined by banks or maxed out existing credit

Accounts receivable factoring is a powerful tool for improving cash flow and supporting growth. The key is working with the right financing partner.

A trusted Canadian business financing advisor can help structure a solution that aligns with your balance sheet and long-term goals.

FAQ/FREQUENTLY ASKED QUESTIONS

How does factoring A/R work for manufacturing companies with long production cycles?

Factoring A/R converts completed invoices into immediate cash after delivery. It eliminates the customer payment wait (often 60 days) but does not fund work-in-progress.

Many manufacturers pair factoring with inventory or purchase order financing to cover the full cash conversion cycle.

What types of businesses are typically rejected for factoring A/R?

Businesses are often declined if they invoice consumers, have high invoice disputes, lack proof of delivery, or sell hard-to-verify services.

Companies with poor customer credit, unresolved tax liens, or government receivables with long payment cycles may also be ineligible.

When should a business use factoring A/R instead of a bank line of credit?

Factoring is ideal when banks decline financing, funding is needed within 24–48 hours, or growth exceeds bank credit limits.

Factors rely on customer credit, not borrower credit, making factoring accessible during early or rapid growth stages.

Where do factoring A/R fees appear on financial statements?

Factoring fees appear as operating or financing expenses on the income statement.

The cash advance is not revenue — it converts accounts receivable into cash. Fees reduce net income when the customer pays.

Why do factoring companies require personal guarantees?

Personal guarantees protect factors in recourse factoring if customers fail to pay.

They also guard against fraud, duplicate invoicing, or misrepresentation. Some non-recourse arrangements still require limited guarantees.

Who collects customer payments in a factoring A/R arrangement?

In most cases, the factoring company collects payment directly after issuing a notice of assignment.

Non-notification factoring allows businesses to collect payments themselves but costs more and requires stronger financials.

What happens if a customer disputes a factored invoice?

Disputed invoices are typically charged back until resolved.

High dispute rates (over 10–15%) can trigger higher fees or termination of the factoring agreement.

How quickly can a Canadian business receive cash through factoring A/R?

Initial setup usually takes 3–7 business days.

Once established, approved invoices are funded within 24 hours, with some providers offering same-day funding.

Can construction companies use factoring A/R?

Construction firms can factor progress billings, but holdbacks reduce advance amounts.

Lien waivers and documentation requirements make construction factoring more complex and slightly more expensive.

Does factoring A/R affect future bank financing?

Factoring can limit bank borrowing while active because receivables are pledged.

However, many businesses successfully transition from factoring to bank financing once financial statements strengthen.

How does factoring A/R help businesses accept larger orders?

Factoring provides immediate cash to fund inventory, labor, and production for large orders.

Funding grows with sales volume, unlike fixed bank credit limits.

What advantages does factoring offer seasonal businesses?

Factoring expands during peak seasons and contracts during slow periods without penalties.

This flexibility prevents recurring seasonal cash-flow gaps.

Can factoring A/R help negotiate better supplier pricing?

Yes. Factoring enables early supplier payments to capture 2–3% prompt-payment discounts.

These savings often exceed the cost of factoring.

Do factoring costs decrease as a business grows?

Yes. Higher invoice volumes and stronger payment histories typically lead to lower rates and higher advance percentages.

Is factoring A/R the same as a loan?

No. Factoring sells invoices rather than creating debt.

It does not add liabilities or affect debt-to-equity ratios.

Can I factor some invoices and not others?

Yes. Selective factoring allows funding specific invoices but usually costs slightly more than whole-ledger factoring.

Will my customers know I’m using factoring?

Usually yes, due to payment redirection notices.

Confidential factoring exists but is more expensive and harder to qualify for.

What’s the difference between factoring and invoice discounting?

Factoring includes collections and credit control by the factor.

Invoice discounting is confidential and requires the business to manage collections.

How do factoring companies determine advance rates?

Advance rates depend on customer concentration, payment history, industry risk, and dispute levels.

Diversified, creditworthy customer bases receive higher advances.

Why are factoring rates quoted differently than bank interest rates?

Factoring is asset-based, not debt-based.

Rates reflect cash acceleration, credit management, and risk transfer — not just interest.

What happens if I want to stop factoring later?

Most contracts require 30–90 days’ notice and settlement of outstanding advances.

Many businesses exit factoring once they qualify for bank credit.

STATISTICS ON FACTORING AR

The global factoring market reached $3.52 trillion in transaction volume in 2023, with Canada representing approximately $150 billion in factored invoices annually.

82% of businesses that use factoring cite improved cash flow as the primary benefit, while 67% report factoring enabled them to accept larger orders they would otherwise have declined.

Canadian factoring volumes grew 8.3% year-over-year from 2022 to 2023, significantly outpacing traditional bank lending growth of 2.1% in the same period.

The average factoring advance rate in Canada is 83%, with rates ranging from 70% for higher-risk industries to 90% for established businesses with creditworthy customers.

Businesses using factoring reduce their days sales outstanding (DSO) by an average of 38 days, converting a typical 60-day collection cycle into immediate working capital.

Small and medium-sized enterprises (SMEs) represent 78% of factoring clients in Canada, with invoice values ranging from $5,000 to $500,000 per transaction.

CITATIONS

International Factoring Association. “Annual Factoring Volume Statistics 2023.” Accessed February 3, 2026. https://www.factoring.org

Medium/Stan Prokop/7 Park Avenue Financial .”Is Factoring Expensive? The Surprising Answer” .https://medium.com/@stanprokop/is-factoring-expensive-the-surprising-answer-35576e73afa2

Export Development Canada. “Trade Finance Solutions: Factoring and Receivables Finance.” EDC Economic Research Report, 2024. https://www.edc.ca

Government of Canada — Innovation, Science and Economic Development. “Key Small Business Statistics 2024: Financing and Growth.” Accessed February 3, 2026. https://www.ic.gc.ca

Linkedin.”What’s a Factoring Credit Line and How Does It Work?” .https://www.linkedin.com/pulse/whats-factoring-credit-line-how-does-work-stan-prokop-t3pgc/

Canadian Federation of Independent Business (CFIB). “Cash Flow and Payment Terms: Survey of Canadian SMEs.” Small Business Research Report, June 2024. https://www.cfib-fcei.ca

Bank of Canada. “Business Outlook Survey: Credit Conditions and Alternative Financing.” Quarterly Financial Report Q3 2024. https://www.bankofcanada.ca

Factors Chain International. “Global Factoring Market Report 2024: North American Trends.” Annual Industry Analysis. https://www.fci.nl

7 Park Avenue Financial.” **How Factoring Finance Works As Your Business Cash Flow Solution”. **https://www.7parkavenuefinancial.com/finance-factoring-receivable-financing-canada.html

‘ Canadian Business Financing With The Intelligent Use Of Experience ‘

STAN PROKOP 7 Park Avenue Financial/Copyright/2026

Published by 7 Park Avenue Financial. Contact us to discuss funding options for your business.

ABOUT THE AUTHOR: Stan Prokop is the founder of 7 Park Avenue Financial and a recognized expert on Canadian Business Financing. Since 2004 Stan has helped hundreds of small, medium and large organizations achieve the financing they need to survive and grow. He has decades of credit and lending experience working for firms such as Hewlett Packard / Cable & Wireless / Ashland Oil