What factoring and receivables financing actually are
Invoice factoring is a sale. You finish the work, raise an invoice, and sell that invoice to a factoring company at a discount to its face value. The factor becomes the owner of the receivable and collects from your customer. Because the transaction is a purchase of an asset rather than a loan, it is not usually treated as debt on your balance sheet, and it does not come with a fixed repayment schedule the way a loan does.
Receivables financing runs the other way. You keep ownership of the invoice and borrow against it, commonly through invoice-based credit lines secured by your accounts receivable ledger. The lender advances funds against the invoices it accepts as eligible, you keep collecting from your customers, and the borrowing is repaid as those payments arrive. Because it is a loan, it is debt, and it brings the interest, covenants and reporting that debt usually brings.
Between the two sits the factoring line of credit: a standing facility rather than a one-off transaction. You agree to route invoices through a provider on an ongoing basis, and the amount available to you rises and falls with your ledger. Some providers run this as a true sale of invoices; others run it as a secured loan that they happen to describe as a factoring credit line. The label on the marketing page matters far less than the contract you actually sign.
How the main options compare
| Feature | Factoring (sale of invoices) | Receivables financing (borrowing) | Factoring line of credit (facility) |
|---|---|---|---|
| What you are doing | Selling the invoice to a provider | Borrowing against an invoice you still own | Selling invoices through a standing facility |
| Ownership of the receivable | Transfers to the provider | Stays with you | Transfers as each invoice is funded |
| Who collects from your customer | Usually the provider | Usually you | Depends on how the facility is set up |
| How the cost is described | A discount on the invoice, plus fees | Interest and fees on the amount advanced | A discount, plus facility and administration fees |
| Effect on your balance sheet | Generally recorded as a sale of an asset | Recorded as debt | Depends on whether the structure is a true sale |
| Who carries customer default risk | Depends on recourse terms | Usually you | Depends on recourse terms |
| How capacity moves | Per invoice or per batch you submit | Set by the lender against your eligible receivables | Moves with your ledger as sales grow |
| Effect on the customer relationship | The customer is usually notified of the assignment | The customer is usually not involved | Depends on the facility and your contracts |
| Often suits | Businesses with creditworthy customers and limited financial history | Businesses with a steady ledger that want to keep collections in house | Businesses that want recurring funding without renegotiating each time |
| Main risk to you | Cost creep, customer reaction, over-reliance on one payer | Debt on the balance sheet, covenants, disputed invoices reducing advances | Commitment terms, minimum volume charges, exit and buy-out fees |
Two answers in that table explain most of the pricing. First, who owns the receivable. Second, who carries the risk if the customer never pays. When a provider owns the receivable and absorbs the credit risk, it is doing more work and charging for it. When you keep ownership and keep the risk, you are borrowing money and staying on the hook for collection.
What decides the cost, and why nobody can quote you a single figure
There is no posted national price for commercial factoring or receivables financing in Canada, so any single number an article hands you is invented. Pricing is negotiated deal by deal. What moves it:
- The credit quality of your customers. A factor or receivables lender is underwriting the payer as much as it is underwriting you.
- Concentration. If one customer makes up most of your ledger, the provider is exposed to one payer going quiet.
- How slowly your customers pay. The longer money is outstanding, the longer the provider's capital is tied up.
- The advance rate. This is the share of the invoice value released up front, and it is negotiated rather than posted.
- Recourse. An arrangement where you stand behind the invoice is priced differently from one where the provider takes the credit loss on approved invoices.
- Volume and commitment. Providers price better when you commit to a minimum level of activity, and charge when you fall short of it.
- Service scope. Collections, ledger administration, credit checking and reporting all cost something, whether or not the fee is itemised.
- Fees that are not the discount. Application and due diligence costs, minimum volume charges, per-invoice administration, and termination or buy-out terms.
When you compare quotes, do not compare the headline discount. Ask each provider for its total cost expressed on the same basis, then put every quote on a comparable period so you are comparing like with like. The lowest rates are only available to the most qualified applicants. A facility that looks cheaper on its discount can cost more once minimum volume charges, due diligence costs and buy-out terms are counted.
For a general picture of how business financing in Canada is organised, the Government of Canada's business financing page is a reasonable place to start before you approach any provider.
Why slow-paying customers make this worth a look
Most businesses face the same mismatch. You pay wages, suppliers and overhead now, and your customers pay later. Growth makes the gap worse rather than better, because every additional order you take on requires cash to deliver before it turns into a payment. Selling invoices or borrowing against them shortens that gap without waiting for the customer to pay.
The second reason is who gets underwritten. An unsecured line of credit or a term loan is usually assessed on your own history, profitability and credit record. A receivable is assessed on your customer's ability and willingness to pay. A young or fast-growing business with strong commercial customers and a thin financial history may therefore fund more easily against its ledger than against its own balance sheet.
The third reason is that capacity moves with sales. As your invoice ledger grows, the amount you can fund against grows with it, which is the opposite of a fixed loan that you have to reapply for. These arrangements also tend to be self-liquidating: the money is repaid as your customers pay, so the facility does not sit there accruing indefinitely the way a term loan does.
There is a discipline benefit too. To fund invoices, a provider has to satisfy itself that your customers are creditworthy, which means you get a read on who you are extending terms to. Many facilities include collections and ledger administration, which can tighten up follow-up on overdue accounts.
Where these products sit among Canadian borrowing options
It helps to see receivables funding against the alternatives. If you own property, a home equity line of credit at a federally regulated lender is generally limited to 65% of appraised property value, with total secured lending usually capped at 80%. That route can be cheaper, but it puts your property on the line and depends on you having equity and qualifying income.
Mortgage qualification at federally regulated lenders generally works to a total debt service ratio ceiling of about 44%, and an uninsured mortgage is qualified at the greater of the contract rate plus 2 percentage points and 5.25% under OSFI Guideline B-20. Canadian fixed-rate mortgages are compounded semi-annually by law. These rules matter if you are considering a secured facility against a home or commercial property rather than against receivables.
On the consumer side of the market, the Criminal Code criminal rate of interest is 35% per year under section 347, and where a province operates a licensed payday lending regime, federal Payday Lending Regulations (SOR/2024-114) cap the cost of borrowing at $14 per $100 advanced. Some provinces set a payday cap lower than $14 per $100, and the lower cap applies. Quebec does not license payday lending, which effectively prohibits the model there. A payday loan is generally up to $1,500 for a term of 62 days or less. That is a consumer product and it is not a way to fund a commercial receivables ledger, but it is useful context when you see short-term business products advertised with similar framing.
Two structural points are worth remembering. Lending in Canada is licensed provincially, so the regulator and the rules differ depending on where you and your provider operate. And complaints about federally regulated financial institutions go to the Financial Consumer Agency of Canada, while provinces license and supervise most other lenders.
If a business owner has a past insolvency, the credit reporting consequences are specific. A consumer proposal stays on a credit report for 3 years after completion, or 6 years from filing, whichever comes first. A first bankruptcy stays on a credit report for 6 years after discharge. Canada has two national credit reporting bureaus, Equifax Canada and TransUnion Canada, and only a licensed insolvency trustee can administer a consumer proposal or bankruptcy. Those facts affect personal guarantees, which some factoring and receivables agreements ask for.
Finally, benchmark rates published by the Bank of Canada, including the policy interest rate, the prime rate, conventional mortgage rates and Government of Canada benchmark bond yields, are benchmarks and not offers. No lender is obliged to lend at them, and commercial receivables pricing is not set directly off them.
Risks and checks before you sign
- Assignment clauses. Some customer contracts prohibit selling or assigning the receivable, or require consent. Check before you commit.
- Recourse. Find out in writing whether you have to repay an advance if a customer simply does not pay, or whether the provider takes that loss on invoices it approved.
- Dilution and disputes. Credit notes, offsets, partial deliveries and non-delivery usually reduce what the provider will advance. Understand how disputes are handled and who pays for them.
- Cost stacking. Add the discount, administration fees, minimum volume charges, due diligence costs and exit terms before you decide a facility is cheaper than another.
- Personal guarantees. These are common and they move the risk back to you personally, sometimes including your home.
- Customer relationships. In a sale-based arrangement your customer is normally notified and pays the provider instead of you. Decide whether that changes how you are treated.
- Concentration limits. Providers cap exposure to a single payer, so a large order from one customer may not all be fundable.
- Regulatory status. Confirm who licenses the provider in your province and where a complaint would go if something goes wrong.
How to compare offers on equal terms
- Write down your ledger: who owes you, how much, and how slowly they pay.
- Decide whether you are willing to sell invoices outright or only to borrow against them, since that choice determines the rest.
- Ask each provider whether the arrangement is a true sale or a loan, and get the answer in the contract, not the pitch.
- Request the total cost over a comparable period, including every fee, minimum and termination term.
- Ask specifically what happens when a customer disputes an invoice or does not pay.
- Check whether a personal guarantee is required, and what it covers.
- Read the exit clause before you sign the entry clause.
loanmoose.ca is not a lender and does not make credit decisions. It is a matching and comparison service that helps you see options and connect with providers. The provider decides whether to fund you, on what terms and at what cost, and lending in Canada is licensed provincially, so the rules that apply depend on where you operate. Because the right structure depends on your customers, your contracts and your cash cycle, and because a factoring or receivables agreement can bind you for a committed term, it is worth getting regulated professional advice before you sign something significant.