How Invoice Factoring Works

What Is Invoice Factoring?

Invoice factoring (also called receivables factoring) is a financing method where a business sells its unpaid customer invoices to a lender (the “factor”) in exchange for immediate cash.

Instead of waiting 30, 60, or even 90 days for customers to pay, companies get most of that money up front. This frees up working capital for payroll, fuel, inventory, and other expenses.

Mehmi Financial Group helps Canadian businesses do this through Invoice & Freight Factoring programs designed for industries with long payment cycles — including trucking, manufacturing, and B2B services.

How Invoice Factoring Works: Step-by-Step

1. You Issue an Invoice
   A customer owes you $50,000 with 60-day payment terms.
   
   
2. You Sell the Invoice to a Factor
   Mehmi (the factor) agrees to advance 85–95% of the invoice amount immediately.
   
   
   
   • In this example, you get $42,500 up front.
     
     
3. Customer Pays the Invoice
   After 60 days, the customer pays the full $50,000 directly to the factor.
   
   
4. You Receive the Balance (Minus Fees)
   Once the factor collects, you receive the remaining balance — $5,000 to $7,500 minus a small factoring fee (usually 1–4%).
   
   

Result: You turn unpaid receivables into fast working capital.

Key Features of Invoice Factoring

• Advance Rates: Typically 80–95% of invoice value.
  
  
• Speed: Funding within 24–48 hours.
  
  
• Flexibility: Use only the invoices you want factored.
  
  
• Industries Served: Transportation, manufacturing, staffing, B2B services.
  
  

For trucking companies specifically, freight factoring ensures drivers and fuel are paid even if shippers take weeks to settle invoices.

Advantages of Invoice Factoring

• Improved Cash Flow – Immediate liquidity without waiting for customers.
  
  
• No New Debt – You’re selling receivables, not taking a loan.
  
  
• Flexible Use of Funds – Cover payroll, buy fuel, pay suppliers, or expand operations.
  
  
• Approval Based on Customers’ Credit – Even if your business credit is limited, factoring may still work.
  
  

Disadvantages of Invoice Factoring

• Cost: Fees are higher than bank loans, typically 1–4% of invoice value.
  
  
• Customer Involvement: Your clients will pay the factor directly, so they will know you’re using factoring.
  
  
• Not for All Invoices: Only valid, creditworthy invoices are eligible.
  
  
• Dependence: Overreliance on factoring may prevent long-term financial planning.
  
  

If you want financing that builds long-term ownership instead, consider an equipment loan or a working capital loan.

Case Study: Freight Company Using Invoice Factoring

A mid-sized trucking fleet in Alberta struggled with delayed payments from freight brokers. Drivers needed pay weekly, but invoices were on 45-day terms.

Solution: They factored $250,000 in receivables with Mehmi.

• Immediate advance: $212,500 (85%).
  
  
• Paid drivers, fuel, and insurance without disruption.
  
  
• Once brokers paid invoices, Mehmi released the remaining 15% minus a small fee.
  
  

Result: The fleet avoided cash crunches, expanded routes, and maintained strong driver retention.

FAQ: How Invoice Factoring Works

1. What industries use invoice factoring the most?
Transportation, logistics, manufacturing, staffing, and B2B services with long payment terms.

2. How much does invoice factoring cost?
Typically 1–4% of the invoice value, depending on volume, customer credit, and terms.

3. Will my customers know I’m factoring?
Yes — they will send payments directly to the factor. This is standard practice.

4. Is factoring a loan?
No. You’re selling receivables. Unlike a loan, it doesn’t add debt to your balance sheet.

5. Can startups use invoice factoring?
Yes — especially if you already issue invoices to creditworthy customers, even if your company is new.

6. What’s the difference between invoice factoring and asset-based lending?
Factoring uses receivables only. Asset-based loans may use equipment, inventory, or receivables as collateral.

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Final Thoughts

Invoice factoring is a fast, flexible tool to improve cash flow when customers are slow to pay. While not as cheap as traditional loans, it provides essential liquidity for businesses that can’t afford to wait.

At Mehmi Financial Group, we specialize in invoice and freight factoring designed for Canadian SMEs.

Want to see how factoring fits into your financing strategy? Contact our credit analysts today.