Invoice Factoring

Factoring sells the invoice. It is not a loan.

You sell an unpaid invoice to a factor at a discount. They advance most of the face value now and collect from your customer.

Three consequences follow.

Your customer's credit is assessed, not yours. The factor is buying their obligation to pay. A young business with weak credit and strong customers can factor when it cannot borrow.

It does not appear as debt in the same way a loan does, because you sold an asset rather than borrowed against one.

Your customer usually finds out. Under notification factoring they are told to pay the factor directly. Non-notification exists and costs more.

How the money actually works

Three numbers, and only the first gets advertised.

Advance rate. The percentage paid up front, typically most of the face value. The remainder is held in reserve.

Discount fee. Charged against the face value, usually per period the invoice stays unpaid. A fee quoted "per 30 days" doubles if the customer takes 60.

The reserve. Released when the customer pays, less the fee. If the customer pays late, your reserve is held longer.

Cost depends entirely on how long your customers take to pay, which means factoring is expensive precisely when your receivables are worst.

Recourse and the part that catches people

Recourse factoring means if your customer does not pay, you buy the invoice back. Most Canadian factoring is recourse. You have not transferred the credit risk, only the timing.

Non-recourse transfers the risk of customer insolvency, at a higher fee, and usually with conditions narrow enough that ordinary non-payment is still your problem. Read what is actually covered.

When factoring fits

• Long payment terms with creditworthy customers. The classic case. Net 60 terms and a payroll every two weeks
• Growth outrunning cash. More orders than working capital, with the orders already invoiced
• A young business with strong customers. Where your own credit cannot carry a loan but theirs can

When it does not

• Consumer invoices or many small ones. Factoring economics favour fewer, larger, business-to-business invoices
• Customers who dispute. A disputed invoice is not factorable and creates friction with the factor
• As a permanent structure. Factoring every invoice indefinitely is expensive. It is a bridge to being funded conventionally