What Is Factoring? Benefits for Canadian SMEs

A plain-English definition

Factoring (also called invoice or freight factoring) converts your unpaid B2B invoices into immediate cash. Instead of waiting 30–90 days, you sell the invoice to a factoring partner and receive an advance now; when your customer pays, the remaining reserve (minus fees) is released to you. Approval focuses more on your customers’ credit than your own, which is why factoring can help startups and fast-growing SMEs.

Start here: Invoice & Freight Factoring.

How factoring works (step by step)

1. Submit invoices you’ve issued to business or government customers for delivered goods/services.
   
   
2. Get an advance (a large percentage of invoice value).
   
   
3. Notice of assignment & verification: Customers are notified to remit to the factor; basic verification reduces fraud/dispute risk.
   
   
4. Customer pays: Funds land in the factor’s account.
   
   
5. You receive the reserve minus the agreed fee.
   
   

Two common structures:

• Recourse factoring: If the debtor doesn’t pay after a set period, you replace the invoice or repay the advance. Lower fees.
  
  
• Non-recourse factoring: Factor assumes specified credit-nonpayment risks (terms vary). Higher fees; good for risk transfer.
  
  

Why businesses use it

• Cash now, not in 60 days: Aligns cash with payroll, fuel, materials, and deposits so growth doesn’t stall.
  
  
• Credit-based on your buyers: Helpful for newer firms or businesses with thin credit.
  
  
• Scales with sales: As invoices grow, available funding grows.
  
  
• Back-office lift: Many factors support collections, payment posting, and debtor credit checks.
  
  

If your challenge is broader (inventory, deposits, staffing), pair factoring with a Working Capital Loan or Business Line of Credit.

What factoring costs (and what drives it)

You’ll pay a discount fee that accrues until the invoice is paid. Pricing depends on:

• Debtor quality & industry risk
  
  
• Invoice size & volume
  
  
• Days outstanding (time-based tiers)
  
  
• Dispute history and concentration (one customer >40% of AR can price higher)
  
  

Because fees accrue with time, good collections hygiene (accurate POs, PODs/BOLs, sign-offs) lowers your effective cost. If you can qualify for a lower-cost term facility, compare options like a Term Loan or Secured Loan; if speed matters most or your balance sheet is light, factoring often wins.

Eligibility checklist (Canada-focused)

• B2B or government invoices only (no consumer receivables).
  
  
• Completed work with clear proof of delivery/acceptance.
  
  
• No prohibitions on assignment in the customer contract (or obtain consent).
  
  
• No conflicting liens on AR (existing PPSA registrations may require subordination).
  
  
• Reasonable DSO and low dispute rates.
  
  

Trucking and logistics, manufacturing/wholesale, and project-based contractors are strong fits. See Transportation & Trucking, Manufacturing & Wholesale, and Construction & Contractors.

Factoring vs. other cash-flow tools

If you own significant equipment and need broader liquidity, Asset-Based Lending or Business Refinancing can complement or replace factoring.

Documents that speed approvals

• AR aging (detail + totals), customer list, and concentrations
  
  
• Sample invoices and backup (POs, PODs/BOLs, sign-offs)
  
  
• Master service agreements or contracts (check assignment clauses)
  
  
• 3–6 months bank statements (for context)
  
  
• Corporate details (articles, ownership, void cheque)
  
  

Well-organized files often see decisions in 24–48 hours once complete.

Common mistakes (and how to avoid them)

• Invoices with open disputes or missing backup → ensure proof of delivery/acceptance and correct pricing before submission.
  
  
• Progress/percentage-of-completion billing → factor only fully earned, verifiable milestones.
  
  
• No assignment consent → review MSAs; if in doubt, obtain a short consent letter.
  
  
• AR already pledged → if your bank has a general security agreement, we’ll coordinate a PPSA subordination or carve-out.
  
  
• Single-debtor concentration → diversify or limit advances to a percentage of that customer’s AR.
  
  

Industry snapshots

• Trucking & logistics: Freight factoring smooths fuel, tires, and maintenance; pair with Equipment Financing as you add units. See Transportation & Trucking.
  
  
• Manufacturing & wholesale: Long terms and large POs benefit from factoring; combine with Asset-Based Lending on inventory/AR. See Manufacturing & Wholesale.
  
  
• Construction & contractors: Use factoring on clean, completed milestones; finance iron separately through Equipment Loans or Leases. See Construction & Contractors.
  
  
• Hospitality & services: For B2B contracts (corporate or institutional), factoring bridges terms while you upgrade with Rent-to-Own / Leases. See Hospitality & Food Service and Medical, Dental & Wellness.
  
  

Mehmi also sells equipment directly—when your expansion includes assets, we can bundle purchase and financing end-to-end.

Case study (realistic)

Business: GTA flatbed carrier serving steel mills
Problem: 45–60 day terms created fuel and maintenance strain during a rapid lane expansion.
Solution: Mehmi arranged freight factoring for primary shippers and a small Line of Credit for weekend fuel spikes. Two months later, they added a used tractor financed via Equipment Loans; AR growth automatically increased available factoring.
Outcome: On-time settlements with drivers, no missed loads, and margin improvement from early-pay supplier discounts. Once revenue stabilized, we explored Business Refinancing to lower blended cost.

Is factoring right for you? A quick litmus test

• 70%+ of revenue is B2B with standard terms (Net 30–60).
  
  
• You have clean documentation and low dispute rates.
  
  
• Growth is constrained by cash timing, not demand.
  
  
• You want a facility that scales automatically with sales.
  
  
• You prefer approval driven by customer credit, not just your own.
  
  

If most answers are “yes,” factoring deserves a serious look. If your needs are single-use (e.g., deposits for a launch), a Working Capital Loan may be simpler. If purchases recur monthly, a Line of Credit may be the anchor, with factoring layered only for slow-pay key accounts.

FAQ

Is factoring a loan?
No. You’re selling invoices. There’s no amortizing payment—fees are netted from collections. Compare with a Term Loan or Unsecured Loan if you prefer fixed repayments.

Will my customers know?
Yes, usually via a short notice of assignment so they remit to the factor. It’s standard in B2B and government settings.

Can I factor only some customers?
Often yes. Many facilities let you choose approved debtors or even individual invoices, subject to minimums.

What if I already pledged AR to my bank?
We’ll coordinate a PPSA subordination/carve-out so the factor can perfect its interest, or we’ll suggest an alternative like Asset-Based Lending.

Is non-recourse safer?
It can transfer specified credit-nonpayment risks, but terms vary and pricing is higher. We’ll help you compare recourse vs. non-recourse against your debtor mix.

Can I combine factoring with equipment purchases?
Yes. Use factoring for operating cash and Equipment Financing for trucks/machines. Mehmi can also supply equipment from in-house inventory.

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If slow-pay invoices are squeezing growth, factoring can unlock cash without adding traditional debt. Feel free to contact our credit analysts via Contact Us to review your AR, debtor mix, and the most cost-effective structure for your situation. Learn more About Us.