Is invoice factoring legal

Legality of Invoice Factoring

Invoice factoring is essentially the sale of accounts receivable. When a business sells its unpaid invoices to a factoring company, ownership of those receivables legally transfers to the factor. This is permitted under Canadian contract and commercial law as long as it’s documented properly.

Many Canadian trucking, construction, and manufacturing companies use invoice & freight factoring every day to manage cash flow.

Regulatory Framework

• Canada: Factoring transactions are treated as a commercial contract between the business and the factoring company. There’s no special license required beyond general lending and commercial laws.
  
  
• U.S. & International: Similarly legal in most jurisdictions, factoring is regulated under commercial law frameworks like the Uniform Commercial Code (UCC) in the U.S. and equivalent rules abroad.
  
  
• Disclosure: Factors must follow standard practices for transparency on fees, advances, and collection responsibilities.
  
  

Risks vs. Legality

While legal, invoice factoring does come with considerations:

• Customer notification: Your customers may be informed that payments must be made directly to the factoring company.
  
  
• Contract terms: Hidden fees or aggressive collection practices can harm relationships if the factoring provider isn’t reputable.
  
  
• Industry standards: In trucking, for example, factoring is not just legal but also standard practice, since freight bills often have long payment terms.
  
  

Case Example

A Canadian logistics firm waiting 60–90 days for shipper payments used factoring to cover fuel, payroll, and repairs. The agreement was a straightforward sale of receivables, entirely within Canadian law. Their factoring partner collected invoices directly from shippers, providing legal protection for both sides.

FAQ: Invoice Factoring and Legality

1. Is invoice factoring legal in Canada?
Yes, it’s legal and widely used in industries like trucking and construction.

2. Do I need my customer’s permission?
No — but customers are typically notified that payments must go to the factoring company.

3. Are factoring fees regulated?
Not by a single national law in Canada, but factors must disclose fees clearly in the contract.

4. Is factoring considered a loan?
No. It’s a legal sale of receivables, not a debt.

5. Can startups use it?
Yes, as long as their customers are creditworthy and invoices are verifiable.

6. Is it legal for international loads?
Yes, many factoring providers handle cross-border receivables for trucking companies.

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Final Thoughts

Invoice factoring is 100% legal and an established financing tool in Canada. It’s not a loophole or grey-area practice — it’s simply a commercial transaction that exchanges receivables for immediate cash.

At Mehmi Financial Group, we offer invoice factoring designed for Canadian SMEs across transportation, construction, and wholesale.

If you’re considering it, try our financing calculator to estimate costs, or contact us for details.