Factoring Companies in Canada: 8 Best Options for Business Funding

What Is Factoring?

If you’re wondering what invoice factoring is, it’s a form of cash advance where a business owner sells unpaid invoices to a factoring provider for an immediate source of funds. The business owner gets liquid capital for the invoice amount, usually after deducting any factor fee, ahead of the payment terms. The business owner’s commercial client, who has the responsibility of settling the invoice, then pays the factoring company directly according to the original payment terms.

Invoice factoring is also known by the terms accounts receivable factoring or receivable financing. (It’s vital to highlight that invoice factoring differs from invoice financing, where a service provider or factoring company still offers a business owner cash for their invoice, but the business owner repays the invoice amount themselves, plus a fee.)

How does factoring work?

Every factoring company has its own unique aspects, but most factoring companies operate in a similar fashion. This is more or less what you can expect when you factor an invoice.

• Business owner submits outstanding invoices for funding.Traditional invoice factoring companies often bind businesses with annual contracts where they must factor all invoices. With many newer companies, you can choose which invoices you want to fund. FundThrough lets you pick which invoices to fund with no minimum funding obligation, unlimited funding, and no long-term contracts requiring you to fund.
• Factoring company does due diligence.Oftentimes this will include checking bank statements to ensure that a business is legally established, is up-to-date on taxes, and doesn’t have liens on their accounts receivable and/or the specific invoice. In this stage, the factoring company also assesses the credit strength and validity of the invoice to ensure its authenticity.1
• The business’ customer is asked to sign an NOA.Having the customer owing the invoice sign a Notice of Assignment means they understand that the factoring company now owns the invoice so they can redirect payment. While a lot of business owners get concerned about their customers being involved, many large companies are used to this process.See how FundThrough works with your customersif this concerns you.
• The business owner gets funded.The business owner receives cash in their bank account, less a fee (or, the invoice factoring cost). They can now have peace of mind that they have cash available to grow their business or cover any other cash flow gap.(This is our favorite part!)
• The customer pays the factoring company according to the invoice terms.When the invoice is due, the customer pays the factoring company, and the funding process is complete.

Types of factoring

There are several different ways factoring is classified. The first is based on how you use factoring as a financing tool:

1. Whole turnover factoring: You sell your invoices to a third-party that advances you a percentage (typically 70-80%) and pays you the rest, minus their service charge, when they collect from your client.

2. Selective factoring: You have an ongoing relationship with the third-party factoring company that allows you to choose which invoices to fund and when.

3. Invoice discounting: You get a short-term loan using your unpaid invoices as collateral. When your customer pays you, you pay the factoring back plus their fee. This means doing your own receivable management.

4. Freight factoring: The only thing different about this type of factoring is that it is tailored to the industry, and some companies, like RTS Financial, specialize in it.

5. Spot factoring: This means you can choose the invoices you want to fund and fund them only when you need working capital. FundThrough offer spot factoring because it gives our clients the greatest flexibility in managing their cash flow.

The second way invoice factoring is classified refers to the structure of your agreement with the factoring company:

1. Factoring with recourse: With this form of factoring, you shoulder the credit risk. If the invoice isn’t settled by your client, you’re accountable for repaying the advanced amount to the factoring company.

2. Factoring without recourse:With non-recourse factoring, the liability of an unpaid invoice transfers to the factoring company. This means you are not responsible for unpaid invoices.

Factoring advantages vs traditional financing

There are a wide variety of advantages of factoring compared to finance methods like lines of credit, including:

• Debt-free funding (invoice factoring is not a loan!)
• Non-dilutive capital
• Much faster turnaround time than traditional financial institutions
• Receivables management saves time, removing the need to chase accounts receivable.

Factoring disadvantages vs traditional financing

Like any financing method, factoring isn’t perfect. Here are the main perceived disadvantages of factoring invoices, especially compared to bank financing, like business loans:

• Invoices need to be verified, so customer contact is sometimes required. (See how we work to maintain your relationships with customersif this worries you.)
• Can be complicated to account for in bookkeeping. (Here’show to record factoring transactions, step by step.)
• Some factoring companies charge hidden fees, such as a service fee or minimum volume fee. At FundThrough, we don’t charge any hidden fees. See our pricing page for more onwhat you can expect to pay for invoice funding.

Get more info on invoice factoring advantages and disadvantages.

What is the cost of factoring?

The cost of factoring depends on details like the advance rate, rates, hidden fees, and net terms. Advance rates range from 70% to 90%, while factoring rates typically range from 1% to 5% per month of the invoice value. Additional charges may include setup fees and transaction fees, varying by provider.

Every invoice financing company uses their own factoring accounts receivable formula, and it’s important to recognize how dollar amounts can affect your decision. (See the pricing page for FundThrough’s pricing, which comes with no hidden fees.)

Invoice factoring rates can vary widely depending on the provider and their specific pricing model. Here are some key factors that might influence the overall cost:

• Invoice Terms: Shorter payment terms like Net 30 can cost less than longer terms such as Net 60, assuming timely payment by your customer.
• Invoice Size: Larger invoices might attract lower factoring fees, as some factors offer scaled pricing based on invoice value.
• Customer Creditworthiness: The financial stability and credit risk associated with your customer can influence your factoring rates.
• Industry Risk: Certain industries may be deemed higher risk, potentially affecting rates.
• Invoice Volume: Engaging in high-volume factoring or consistently using factoring services can lead to more favorable pricing.
• Factoring Type: Rates can vary between recourse and non-recourse factoring, with non-recourse generally costing more due to the factor assuming a higher risk.

For a comprehensive breakdown of what goes into the total cost of factoring, see our article on invoice factoring rates.

What Types of Businesses Qualify for Factoring in Canada?

Businesses that qualify for factoring in Canada include manufacturers, wholesalers, distributors, transportation companies, service-based businesses, and more. Qualification depends on having creditworthy customers and consistent invoicing. Startups and businesses with limited credit may also qualify, as approval focuses on customer creditworthiness rather than the business’s financial history.

How do Canadian factoring companies differ from U.S. providers?

Canadian factoring companies differ from U.S. providers in regulatory frameworks, currency options, and market focus. Canadian firms often handle transactions in CAD and USD, while U.S. providers primarily use USD. Canadian companies also prioritize compliance with Canadian laws, while U.S. providers focus on U.S. regulations and larger markets.

What Is a Factoring Company?

An invoice factoring company – also sometimes called a factor – is a company that provides invoice factoring services. They’ll advance the invoice amount (minus any fees) and wait to collect on the original invoice terms from the original customer.

What to Look for in a Factoring Company

The best factoring company in the gives you access to quick funding when you need it, often within a business day, that suit your needs. Each company will require certain steps and documents in order to qualify, but most of them have a similar factoring process. There are a number of factoring companies in Canada, so it’s important to compare your options to ensure you’re getting the right fit for your unique situation.

Do factoring companies need to be local?

While some business owners feel more comfortable with a local company, a receivable factoring company doesn’t have to be local to pay your invoices quickly. With online factoring, you can get invoices funded across North America. If you’re a Canadian business, you can check out our guide that reviews some of the most reputable factoring companies in Canada.