Invoice factoring describes a simple exchange. A business that has finished work but is waiting to be paid sells that unpaid invoice to a funding provider, and the provider collects from the customer. What follows is the order in which that exchange usually happens in Canada, and the parts of it worth understanding before you speak to anyone.
The detail differs from one provider to the next. The structure, though, is consistent enough to describe in general terms. Read this page alongside the questions listed on the home page, which are the ones worth asking before a signature.
The three parties
Every arrangement involves three parties, and keeping them separate makes the rest of the process easier to follow.
| Party | What they do |
|---|---|
| Your business | Delivers the work, issues the invoice, and transfers the right to be paid to the provider. |
| Your customer | Owes the invoice and pays it on the due date, either to you or to the provider, depending on the arrangement. |
| The funding provider | Buys the invoice, advances part of its value, collects the balance and charges a fee for the service. |
In the industry your customer is often called the account debtor, and your business is called the client or the seller. The labels do not change anything about the money. They only describe who is who in the agreement.
Assignment of the invoice
Factoring depends on assignment, the legal step that transfers your right to receive payment to the provider. Once an invoice is assigned, the provider is entitled to the money, even though your customer's obligation is unchanged.
Because assignment hands over a right to payment, most agreements ask you to confirm that the invoice is genuine, that the work was completed and accepted, that the amount is undisputed, and that the invoice has not already been pledged to another lender. A provider that later finds an invoice was already committed elsewhere will treat that as a breach of the agreement, not as an oversight.
Assignment also interacts with other security you have given. If your bank holds a general security interest over your receivables, a factoring provider will usually need the bank to acknowledge the arrangement. That is a matter of priority between creditors, and it is normally handled before the first invoice is sold.
The advance and the reserve
When you sell an invoice, the provider pays part of its face value up front. That payment is the advance. The rest is held back as a reserve until your customer pays.
The size of the advance and the timing of the reserve release are set by the provider. They can depend on the customer's credit standing, the size of the invoice, the payment term and how long the arrangement has been running. Nothing about those two numbers is standard across the industry, and a provider should be able to show you both in writing before you sell anything.
When the reserve is released, the provider deducts its fee. What arrives in your account is therefore the invoice value less that fee. If the customer pays late, the agreement decides whether the fee changes and how the reserve is handled.
Verification
Before buying an invoice, a provider verifies it. Verification usually means confirming that the work was actually done, that the amount is correct and that the customer accepts the charge. In practice that means paperwork: a signed bill of lading or proof of delivery, an approved timesheet, a purchase order, a progress certificate or a signed acceptance.
Verification may also include a direct check with your customer's accounts payable department. Under some arrangements the provider contacts the customer routinely. Under others it does so quietly, or only when something looks unusual. Either way, clean paperwork makes verification faster, and disputes make it stop.
Notification and non-notification
Notification describes whether your customer is told that the invoice has been sold. It is one of the clearest dividing lines between arrangements, and it changes who your customer deals with when payment is due.
Notification factoring
Your customer receives notice that the invoice has been assigned and is asked to pay the provider directly. The provider then handles collection, including reminders and follow up on overdue amounts. This is the more common structure in freight and in trades where invoices are routine and customers expect it.
Non-notification factoring
Your customer is not told, and continues to pay your business as usual. You then remit the payment to the provider. Non-notification keeps the relationship in your hands, but it puts the collection work and the remittance discipline on your side, and providers usually reserve it for businesses with a steady payment record.
Some agreements start as non-notification and switch to notification if invoices run past their due date. Ask which applies to you, and whether that can change during the term.
What a provider reviews
The review focuses on the invoices and the customers who owe them, rather than on your balance sheet in isolation. In general terms, a provider will look at:
- The credit standing of the customers whose invoices you want to sell.
- The size and number of invoices, and whether they are large enough to be worth buying.
- How much of your ledger sits with one customer, since concentration changes the risk.
- The payment terms you offer, and whether your customers usually pay on time.
- Whether invoices are routinely disputed, deducted or short paid.
- Your own trading history and the contracts behind the work.
A newer business with strong customers can sometimes qualify where an older business with slow paying customers does not. The provider is buying a receivable, so the receivable is what gets examined.
What factoring costs
There is no standard price for factoring in Canada. The fee is set by the provider and depends on the arrangement, the invoices, the customers and the work involved in collecting them.
Providers describe their fee in different ways. Some quote a discount applied to the invoice value. Others price on the number of days the money is outstanding. Some charge separately for verification, for funding a single invoice, or for ending an agreement early. Because the structures differ, comparing two quotes means comparing what each one includes, not just the headline number.
Ask for the fee in writing, with an example worked through on a real invoice of yours, and ask what happens to that fee if your customer pays late. A provider that cannot show you that before you sign is not giving you enough to decide with.
Security registration
Factoring agreements in Canada are commonly supported by a security interest registered against your business. In the common law provinces, that registration is made in the provincial personal property security registry, usually referred to as the PPSA registry, where provincial law provides for it. In Quebec, security is registered in the Registre des droits personnels et réels mobiliers, generally called the RDPRM, and agreements there are shaped by the Civil Code of Quebec.
Registration makes the provider's interest public and sets its priority against other creditors. It does not transfer ownership of your company, and it does not stop you trading. It does mean the registration exists on a public record until it is discharged.
Ask when the provider will discharge the registration after the arrangement ends, and get the answer in writing. A registration left in place after an agreement finishes can affect later financing.
When a customer pays late
Late payment is where arrangements differ most, and where the agreement matters more than the sales conversation. Under a recourse arrangement, an unpaid invoice may come back to you, and you may be required to buy it back. Under a non-recourse arrangement, the provider may carry more of the credit risk, but only within the conditions it has set, which often exclude disputes and require notice within a set number of days.
Slow payment also affects cost. If the fee is calculated on days outstanding, a customer who pays in 90 days rather than 30 changes what the arrangement costs you. Ask what happens at 30, 60 and 90 days past due, and what you are expected to do at each stage.
What this page does not tell you
It does not tell you what a specific provider will offer, because terms are set provider by provider and change over time. It is general information, not financial, legal or tax advice. Before you commit, read the agreement, ask about the points above, and take advice from your own accountant or lawyer where the amounts justify it.