Factoring Companies in Canada and Their Value to Business Owners

Small and mid-sized business owners (and often owners of larger businesses) face serious challenges when it comes to ensuring cash flow at all times. This is particularly problematic in the B2B world, where it might take your client or customer a month, two months, or even three months to pay their bill (that’s where factoring companies in Canada fill in the gap). While you’re waiting for that payment, you’re somehow expected to carry on business as usual, but you know that’s sometimes not possible. A lack of liquid capital in your business can lead to many problems, including:

  • Being unable to pay employees
  • Being unable to take advantage of immediate business opportunities
  • Being unable to pay suppliers and/or vendors
  • Being unable to pay for logistics, warehousing and other vital services

In short, it can lead to your business grinding to a screeching halt. The answer might be to work with one of the many factoring companies in Canada. Not sure what factoring is, or how Canadian factoring companies might be able to keep your own business not only afloat, but growing and healthy?

The Factoring Process Explained

So, what is factoring, anyway? Really, it’s nothing more than selling a business asset to obtain capital immediately. In this case, what you’re selling is an unpaid invoice. You sell that invoice to one of the many Canadian factoring companies in exchange for an advance on the amount due. With that money, you can pay vendors, or employees, or you can grow your business as you see fit.

Once your client or customer pays the invoice, the factoring company will pay the remainder of the invoice, in exchange for a small fee. The fee charged is usually between 1 and 5% of the invoice total. Of course, this varies significantly between factoring companies, so make sure you know the fees being charged, as well as the reserve requirement before committing to any contract.

Is Factoring Another Form of Debt?

Most business owners have been conditioned to assume that all forms of business financing are just debt in different packaging. Factoring is not debt. It’s liquidating an existing asset in exchange for funding (cash). Because you’re selling an asset, there’s no fear about adding yet more debt to your overburdened business, and there is no need to worry about your business credit not being perfect.

In fact, your credit doesn’t enter into the equation at all. The process is entirely centered on the creditworthiness of your customer. Of course, if your customer doesn’t have good credit and has a history of defaulting on their bills, you might find it hard to sell their invoice. After all, factoring companies in Canada must protect themselves from risk as well.

Do Factoring Companies in Canada Advance 100% of the Invoice Amount?

Most factoring companies do not advance 100% of the invoice total. Instead, they advance on average between 70 and 90% of the total, although this varies significantly from one factoring company to another. Again, this differs from company to company, so make sure you know exactly how much the factoring firm is willing to advance before you decide on a partner. Also, understand that this might depend on other factors, such as the creditworthiness of your client.

Terms You Should Know When Dealing with Factoring Companies in Canada

Factoring Companies in CanadaWhile factoring is one of the oldest existing forms of business financing, it’s new to many small business owners. That newness and lack of familiarity can lead to some confusion, so let’s clear it up by explaining some of the most common terms you’ll encounter during the factoring process.

Factoring: This is the process of selling your invoice to a factoring company, from beginning to end.

Advance: This is the amount the factoring company gives you before your customer pays their invoice. Note that it is almost never 100% of the invoice’s value.

Rate: The rate is the percentage of the invoice total that you’ll be charged as a factoring fee. It’s generally between 1% and 5% of the invoice’s value.

Reserve: The reserve is the amount of the invoice not given to you in the advance. It’s usually between 30 and 10%, although some companies have a much lower reserve (1 to 2%). Note that the reserve is not necessarily the amount you will receive when your client/customer pays the invoice.

Recourse: Recourse factoring means that if your client doesn’t pay their bill, you’re responsible for repaying the advance given to you by the factoring company.

Non-Recourse: Non-recourse factoring means that the factoring company assumes full responsibility for your customer’s payment (or lack thereof), and you do not have to repay any of the advance if they fail to pay.

Generalist: A generalist is a factoring company that works with clients in a wide range of industries. Depending on your company, this may not be the right choice.

Specialist: A specialist is a factoring company that specialises in serving clients in a particular industry or niche, such as transportation, manufacturing, construction and the like. For most small business owners, specialists are the better option (but not always).

Collections: This is a back office service offered by factoring companies in Canada that can add additional value, and free up your time to focus on growing your business. In this instance, the factoring company will handle all invoice collections.

Billing: Some factoring companies in Canada provide billing services to their clients, essentially allowing you to outsource some of your back office tasks and benefit from additional time to focus on business growth.

Account Creditor: This is you – the owner of the invoice and the business to which the client/customer owes money.

Customer: This is your customer or client – the business or individual that owes the money noted on the invoice.

Discount Fee: This is the same as “fee” explained previously – the cost of factoring assessed on the value of the invoice and accounted for from the reserve after your client pays the invoice.

Rebate: The rebate is the amount of the reserve (less the discount fee) that you’ll be paid when your client or customer settles their debt on the invoice.

How to Choose Factoring Companies in Canada

As a small business owner, it’s essential that you have a steady influx of cash into your business. Without that, you’re facing serious problems. Even if there is sufficient capital for you to pay your bills and your employees, there most likely is not enough to expand your business or focus on growth.

This can lead to stagnation, and many businesses ultimately fail not because they weren’t profitable, but because their clients simply didn’t pay quickly enough for the business owner to make positive growth decisions. Working with factoring companies in Canada can help you avoid that fate.

Of course, you’ll need to know how to choose the right company. They’re not all the same, and you cannot afford to make a mistake here.

Do They Specialise?

One of the most important questions you’ll need to answer prior to signing a contract with any factoring company in Canada is whether they’re specialised in your industry or not. We touched on this previously, but we cannot overstate the importance here.

Choosing to work with a generalist might seem like an innocuous decision, but it can cause serious issues. If your industry has complex requirements or regulations, and the factoring company is not familiar with them, it can lead to many issues. The same is true for how your business operates.

For instance, if you run a transportation company, you will need features and services that differ greatly from businesses in other industries. You might need credit checks on potential customers, or you could need access to a fuel card or fuel advance to keep your truck on the road. The same considerations apply to businesses in other industries – working with a specialist is usually a better option than a generalist.

What Benefits Does the Company Offer?

Again, the factoring process alone is of significant benefit for cash-strapped business owners, but many factoring companies in Canada have started offering additional benefits. As mentioned, many can offer back office services such as billing and collections to free up your time. Others offer discounts, or access to additional services. While these can be of benefit to your business, they do come at a cost, so make sure you understand how much each benefit is costing you, and whether you can save money by bundling services, or by unbundling services (a la carte).

The Right Type of Factoring

While invoice factoring is one of the most common options out there, you’ll find a number of different factoring choices. They all sound pretty similar, but they’re actually very different. For instance, AR financing is not the same as invoice factoring, which is not necessarily the same as invoice financing. Know the differences, and know which one will fit your needs best.

Compare Rates and Fees

The discount fee can vary a lot between different factoring companies in Canada, but that is probably not the only cost you’ll incur. You need to know what other charges the company assesses. These should all be spelled out in the contract, so make sure to read it thoroughly before signing. Also, you should be able to get a full explanation from the factoring company’s representative. If they’re hesitant or completely reticent about giving you information pertaining to fees and charges, avoid that company. This is a sign that they’re unethical, and that you should look elsewhere for a worthwhile partner.

Do They Require a Long-Term Contract?

While some factoring companies in Canada are more than happy to allow you to factor invoices as you like (one at a time, for instance), others are not. In this situation, you may be required to factor all future invoices with that client through the company. In other instances, you might be required to let the factoring company handle all of your invoices. While that can be beneficial for many business owners, as it saves them time and hassle, it’s ultimately more costly than doing it yourself, and may not be the best fit for your needs in the long run.


Most factoring companies in Canada will inform your customer that you’ve sold their invoice and that the factoring firm will be collecting the amount due. This is standard operating procedure, and chances are good that your customers are familiar with factoring and it won’t be a problem. However, in some instances, confidentiality matters, and you’ll need to make sure that you work with a factoring company that provides non-notification factoring.

Interview All Factoring Companies You’re Considering

Ideally, you’ll find several factoring companies in Canada that seem promising. Once you’ve located them, it’s time to interview them. During this time, they should explain their fee structure and factoring processes. Look for transparency, and for reps that are happy to answer questions, clarify when necessary, and ensure that you have the information you need to make an informed decision. Once you’re done interviewing each company, compare the contracts offered by each and make your decision.

Your Next Step

If you’re ready to take the next step and ensure that your business has the stream of capital needed to foster growth, you’ll need a helping hand. The factoring industry can be complex, and there are multiple types of factoring out there that sound very similar, but work in very different ways. We offer a free consultation with one of our factoring specialists to help ensure that you have the information needed to make an informed choice. Get in touch with us today.