What is Accounts Receivable Factoring?

The demand for accounts receivable factoring in Canada has been steadily increasing as companies use this solution to improve their cash flow. In this article, we provide a detailed explanation of how factoring works and how transactions are structured. We cover:

  1. What is accounts receivable factoring?
  2. How does it work?
  3. Types of factoring
  4. Advantages and disadvantages
  5. Costs
  6. Do you qualify?

1. What is accounts receivable factoring?

Accounts receivable factoring is a type of financing used by companies that need to improve their cash flow. It allows companies to finance their accounts receivable, which are usually due in 30 to 60 days. The financing line provides immediate liquidity that companies can use to pay suppliers or other obligations.

2. How does it work?

Most factoring transactions are structured as the sale of your accounts receivable to the finance company. Most transactions purchase receivables using a two-instalment process. However, single-instalment transactions are common in some industries.

a) Single-instalment transactions

In a single instalment transaction, the factoring company advances up to 93% (this amount varies) of the accounts receivable value. From that point forward, the factoring company holds the invoice until your end customer pays on their usual terms. The percentage that is not advanced becomes the factoring company’s fee. Single-instalment transactions are typical in transportation, especially with small carriers and owner-operators.

b) Two-instalment transactions

Two-instalment transactions are the most common in the industry. In a two-instalment transaction, the factoring company advances 85% of the invoice amount. The remaining 15%, less the factoring fee, is deposited into your bank account once your customer pays on their usual terms. The second instalment settles the transaction. To learn more, read “How Does Factoring Work?

3. Types of factoring

There are two types of factoring programs: recourse and non-recourse programs. Most factors usually offer one of the factoring programs, though some can offer both. The difference between the recourse and non-recourse plans lies in who absorbs the loss if your client defaults on a payment.

a) Recourse factoring

In a recourse transaction, the client sells an invoice that is guaranteed to be paid by the end customer. The factoring company can return any unpaid invoice after a specified number of days (usually 90). The client is usually responsible for returning the advance and accrued fees when this happens.

The most common reason for a factor to invoke recourse is when an end customer disputes the client’s invoice and does not pay it. This situation is best resolved directly by the client. Consequently, the factor returns the invoice to the client for handling.

b) Non-recourse factoring

Non-recourse transactions are similar to recourse transactions, with one exception. The factoring company cannot invoke recourse if the end customer does not pay due to a customer’s insolvency (bankruptcy). However, any invoice subject to a dispute or other issues can still be returned.

Note that factoring companies have sophisticated credit review and scoring mechanisms. These tools enable factors to identify risky invoices before financing them. However, it does offer protection in the rare event this happens.

4. Advantages and disadvantages


Factoring your invoices offers several advantages for your business. The four most important benefits of factoring are:

a) Improves cash flow

The most important advantage is that factoring improves cash flow, enabling your company to sell to customers on net-30 terms. When used correctly, factoring can be used to grow the business.

b) Available to small companies

This solution is available to small companies, including single-person businesses.

c) Adaptive credit limit

The credit limit is adaptive and can grow alongside your business as long as your company invoices creditworthy customers.

d) Easy to obtain

Factoring has easier and simpler qualification requirements than comparable options.


However, the solution is not for everyone. Factoring has some disadvantages that business owners must keep in mind.

a) Cost

Factoring is more expensive than conventional loans and lines of credit. The higher cost is due to transaction risk and the labor required by factoring companies to manage the line.

b) Customer interactions

The factoring process is not entirely transparent to your customers. For example, factors usually have to verify invoices to ensure that the information on them is accurate. Verification is performed through an online portal if your customer has one. Otherwise, verifications are done via email and phone calls.

5. Costs

The cost of a factoring line is based on its size, risk, and client industry. Costs range from 1.5% to 4% per 30 days outstanding, though the rate is usually prorated.

a) Flat rate

A flat rate is the simplest pricing structure for factoring. It uses a single rate that applies to all factored invoices regardless of how long the end customer takes to pay them.

b) Incremental rate

The incremental rate structure is the most common in the industry. It charges a percentage for the time that the invoice is outstanding. Examples include “1% per 10 days”, “2% per 20 days, .1% per day thereafter”, etc.

c) Other options

Larger lines, usually those over $600,000, often have different pricing models that resemble those of an asset-based loan. Examples include “X% of the invoice (one-time) and Y% of utilized funds (monthly average).”

6. Do you qualify?

The due diligence process for accounts receivable factoring is simpler than for other financing solutions. In most cases, the process can be completed in a couple of days and focuses on three key areas:

a) Are the invoices creditworthy?

Factoring companies rely on the client’s accounts receivable as the primary collateral backing the transaction. Consequently, the invoices must be from companies with a strong commercial credit rating. Most factors use a credit bureau such as Dun and Bradstreet or Equifax to determine creditworthiness.

b) Are the invoices encumbered by liens?

Factoring companies must have a first position against the invoices securing the line. They review the collateral to ensure there are not encumbered by a PPSA or a hypothèque.

c) Is the company at risk of tax or legal issues?

Finance companies also verify that there are no significant risks that could affect the company in the near term. These risks include bankruptcy, lawsuits, or tax issues with the CRA.

Get more information

Are you looking for a receivables factoring quote? We are a leading factoring company in Canada and can provide you with high advances at low rates. For more information, get an online quote or call us toll-free at (877) 300 3258.