Invoice Factoring

Invoice factoring is a type of financing solution offered by financial institutions to companies wherein outstanding invoices are converted to immediate cash and paid out to the business to assist with short-term liquidity needs.

Smarter Loans have partnered with Canada’s top invoice factoring providers who’ve helped thousands of businesses just like yours solve their urgent needs by getting access to immediate funds.

Browse through our list of trusted invoice factoring companies, click “Apply Now” to start a short online application with the selected company.

You also have the option to Pre-Apply with Smarter Loans. We will review your information and look through our network of partners to find the most suitable and reputable invoice factoring provider for your business.

We can help connect you with the top invoice factoring companies in Canada.

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Top Invoice Factoring Providers in Canada

Company
Amount
Interest Rate
Reviews
Terms
$5,000 - $100,000
Starting at 15%
12 - 18 Months
$4,000 - $300,000
5.49% - 22.79%
6 - 60 Months
$5,000 - Unlimited
Starting at 4.6%
2 - 10 years

Invoice Factoring: Background

Picture a business (Business ABC) that sells to multiple different customers on credit every month. Typically, Business ABC offers these credit customers 30 to 90 days to repay their outstanding amounts. This is known as the company’s accounts receivable, which is shown as an asset on the balance sheet, but critically, is not liquid cash. On the other hand, Business ABC’s own creditors require their payments to be made in cash at the end of each 30-day cycle.

For simplicity’s sake, let’s assume that the debtors pay their dues in 60-day intervals while the creditors are required to be paid in 30-day intervals. This type of situation creates what is known as a funding gap, where the business does not have adequate liquidity to fund its upcoming debts due.

It is in this type of scenario that a solution such as invoice factoring is a viable option.

Types of Invoice Factoring in Canada

There are two main types of invoice factoring:

TYPE 1: In Type I, the business consolidates its invoices and passes it along to the financial institution for evaluation. Based on its internal risk parameters, the financial institution will then assign a discount, and advance the remaining amount to the company. The differential between the total amount and the advance financing amount is the financial institution’s fee for conducting the transaction. For example, if there are $10,000 in outstanding invoices for the company, the bank will advance $9,750 and keep the remaining $250 as fees.

TYPE 2: In Type II, the business once again consolidates its invoices and passes it along to the financial institution for evaluation. However, in this type of structure, the institution will advance a nominal amount (typically 70% to 90%) upfront. The remaining amount (known as the reserve) will be provided to the company upon payment of the outstanding debts by the company’s debtors. For example, if there are $10,000 in outstanding invoices, the company will receive $8,000 upfront (80% of the total value). Post the repayment of the accounts receivable, they will then receive the other $2,000 less a fixed charge set by the financial institution for its services.

In both these instances, it is pertinent to note that once the invoices have been passed on to the financial institution, the company’s debtors pay the institution directly i.e. the risk and responsibility of collection lies with the institution thereafter.

Invoice Factoring Uses

As noted above, invoice factoring is helpful for businesses requiring short-term liquidity to pay out creditors on time and/or yield trade discounts. It is also used extensively by businesses that want to simplify their cash conversion cycles by reducing the administrative efforts of collection.

Invoice Factoring Process Canada

The Factoring Procedure Explained

The following explanation pertains to the Type II process wherein the customer receives an advance amount, and then a reserve amount once all dues have been collected. As can be seen from the diagram above, there is typically a 5-step procedure encompassed in invoice factoring.

  • Invoicing:

    The first step is to invoice the customer buying goods or services on credit (typically for periods up to a maximum of 90 days). Once these invoices have been issued, the company then has to consolidate them and send them across to the financial institution for review.

  • Factoring:

    Once the financial institution steps in, they will determine if the invoices meet certain eligibility criteria to receive the financing. Typically, they will also ask the business to provide information on their debtors to conduct further due diligence on their creditworthiness and credit history. Once the institution is assured of and comfortable with the risks, the two parties will sign a financing agreement stipulating the maximum amount that can be factored at any given time.

  • Advance:

    Once the financing agreement is signed, the business will receive an advance from the financial institution that is contingent on several factors such as the size of the factoring, the industry, and other internal risk metrics that the bank gauges before issuing the funds.

  • Debtor Repayment:

    Thereafter, the client will then pay the factor provider i.e. the financial institution directly as per the terms of the invoice. In most situations, the factor provider follows the same collection patters as the business, ensuring that any relationship repercussions with customers are mitigated.

  • Reserve:

    Once the debts are received by the financial institution, the reserve amount is paid to the original customer and a fee is deducted for the institution’s intermediary services.

Fees

The fees of a factoring provider are contingent on several internally-defined variables. These include:

1. Overall volume of monthly receivables: The greater the volume, the lower the fees as the bank can generate economies of scale with the higher volumes.

 

2. Size of each invoice: “Lumpy” revenues create additional risk for the financial institution as the repayment risk is concentrated within a small group of debtors. In contrast, smaller-sized invoices are likely to be more favourable from a banking perspective.

3. The industry: Certain industries carry more inherent risk than others due to cyclicality, seasonal or other economic issues. Industries considered to be higher risk will be charged a higher fee accordingly.

4. Creditworthiness of customers: Large corporate or government customers have less risk of repayment than smaller enterprise customers who are not as established.

5. Repayment Schedules: The longer it has typically taken customers to repay in the past, the higher the fee charged to cover the risk of non-payment.

Key Merits

Invoice factoring has been a financing solution used by hundreds of businesses of all sizes across Canada to increase working capital, and unlock trapped cash flow in the business. To this end, some of the key advantages it offers include:

Better Payment Terms:

In particularly fragmented competitive landscapes, offering customers the luxury of extended payment terms can be just as powerful as reduced pricing in some industries. With invoice factoring, this can be made possible in the knowledge that the business will not have to wait until repayment is complete to be able to gain liquid cash.

Shorter Cash Conversion:

With the advance payments being received right at the completion of the financing agreement, businesses can have a larger amount of liquid cash as and when needed to fund obligations. Once this financing agreement has been signed and is in place between the financial institution and the business, the advance can be received in as little as one business day. This is in contrast to the status quo method, where the business would only be able to have that cash flow after the debtor has paid back the amounts owed (which could be up to 90 days or even longer).

Easy Applications:

The process for invoice factoring is much more simplified than other alternate financing solutions. It is much easier to qualify for invoice factoring provided that the company is established, has a stable operating history, sells to relatively stable customers and has not faced major continuity problems in the past.

Conducive to Growth:

The value received from invoice factoring is directly proportional to the value of the invoices being factored. That means that when a business is experiencing high growth in customer volumes, it can factor this larger volume and receive equivalent advances seamlessly.

Considerations

 

However, despite its obvious advantages in working capital improvement, invoice factoring does come with certain limitations. These include:

Costs: The invoice factoring process typically is slightly more costly than other forms of funding due to its fee-based structure. Because the burden of collection falls directly on the financial institution, these fees are proportionally higher to compensate them for the additional services rendered. This is in contrast to debt or equity financing wherein the business itself is responsible for all aspects of operational continuity even after raising the capital.

Short-term Capital: Invoice factoring is not designed to be a long-term solution for raising funds to deploy towards growth or capital expenditures. It is more of a short-term solution to generate additional liquidity in the business for obligations coming due within 30 days or less. Therefore, the amounts received are typically lower relative to debt or equity financing which are traditionally more aligned with the requirements for capital investment.

Invoice Verification: The due diligence process of financial institutions to assess the eligibility and suitability of invoice factoring includes invoice verification where customers will often be interviewed to evaluate whether they are satisfied with the product and/or whether they have the financial capabilities to pay off outstanding debts. This can be cumbersome from a customer’s perspective.

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Types of Invoice Factoring offered:

  • Trucking Companies
  • Business Services
  • Staffing Agencies
  • Manufacturing
  • Technology Sector
  • Consulting
  • Distributors
  • Landscaping
  • Logistics
  • Advertising
  • Wholesalers
  • And More

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