How does Factoring Work?

This article provides a detailed view of how factoring works and of how a factoring transaction is structured in Canada. It covers everything from setting up an account to financing the first batch of invoices.

Transaction Summary

In a factoring transaction, you sell your invoices to a finance company in exchange for an immediate payment. Invoices are typically paid in two instalments.

The first instalment – the advance – is provided as soon as you factor the invoice. The second instalment – the rebate – is provided, less a fee, once your client pays the invoice in full. Transactions use the following format:

  • You submit an invoice to the factoring company
  • The factor provides the advance – often 80% of the invoice
  • After 30 to 60 days, your client pays
  • The factoring company rebates the remaining 20%, less its fee

There are some variations to this format, but the majority of factoring companies use it.


There is no standard pricing for a factoring transaction, as each company uses its own model. As a result, comparing proposals can be difficult. Regardless of the model, though, all-inclusive pricing should range from 1.5% to 4.5% per 30 days for most companies. If you want an instant online quote, please fill out this form.

The following pricing models are the most common:

a) Flat fee

The flat fee is fairly simple and common among small carriers in the transportation industry. Basically, the factoring company charges you a fee of X%. For example, the factor could charge your company a flat fee of 4% to purchase your invoices.

b) Percentage for a block of days

In this model, the factoring company charges a percentage for a recurring number of days. For example, they could propose a factoring fee of “1% per every ten days” (1% for every ten days that the invoice is outstanding). Using a ten-day interval is common, but factors also use 15-day intervals and 30-day intervals.

Some factors also use a combination of intervals, such as “2% for the first 20 days, and .1% per day after that.”

c) Discount fee and outstanding utilized balance fee

Factors can also charge an initial, small, flat fee, coupled with a fee tied to the outstanding balance. For example, they could charge an initial discount of X% and a fee of Y% per day on the utilized funds. This structure is commonly used for larger companies.

Application and Proposal

This section describes the steps required to set up a factoring account: the application, the proposal, and the contract stages.

Step #1: Submit an application

The first step is to submit an application. Gather all the required documents, such as A/R Aging reports, financial reports, and corporate documents, and submit them to the factor.

Step #2: Factoring company performs its due diligence

With your application in hand, the factor performs its due diligence review. During the due diligence process, the factor checks the commercial credit of your clients and verifies that your company is in good standing.

Step #3: Review the factoring proposal

If the factoring company’s due diligence is successful, they submit a proposal. The proposal outlines the terms of the service and the cost. If the terms are agreed upon, the factor provides you with legal documents – a contract.

Step #4: Sign legal agreements

If both parties agree to the terms of the contract, they execute it and begin the process of financing invoices. If it has not already done so, the factor secures its collateral using the PPSA (or a hypothèque in Quebec). Once these arrangements are in place, your account is ready to be funded.


The process of funding the account is relatively straightforward.

Step #5: Send notifications

Each customer whose invoices you factor needs to be notified of the relationship through a notice of assignment. This document is sent once to each customer, at the beginning of the relationship, and explains how payments must be handled.

Step #6: Submit the batch of invoice

Submit the batch of invoices – electronically or by fax – to the factoring company.

Step #7: Invoice verification

Once the invoices have been received, the factor performs a random verification of the invoices to ensure that they are correct and still outstanding.

Step #8: Factoring company sends the advance

Once invoices are verified, the factor submits the advance either by sending you a cheque, a wire transfer, or an ACH. Usually, the advance can be paid within a day of invoices being submitted.

Step #9: Customer pays. Factoring rebate is sent

Once your customer pays the invoice in full, the factoring company calculates the settlement amount. This amount is rebated as per your contract (this amount varies).

Get more information

Are you looking for a factoring quote? We are a leading Canadian factoring company and can provide you with high advances at low rates. For information, get an online quote or call (877) 300 3258.