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Which type of invoice factoring is right for your business?

Invoice factoring could be an efficient way to improve your cash flow, but do you know what type will best suit your business?


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Invoice factoring lets your your business unlock money your clients owe by selling their invoices to a third party for a fee. It can be a great source of working capital, especially if your business is in an industry that has a hard time getting a loan. But there are several different types of factoring to choose from — and not all are right for every business.

First, what exactly is invoice factoring?

Invoice factoring is a type of business financing in which a business sells their unpaid invoices to a factoring company at a discount. The company typically gives businesses between 75% and 90% upfront and then the rest of the funds after your clients pay up — with a fee subtracted.

Businesses can use their funds for any legitimate purpose like working capital. It can be expensive, so you might want to consider less costly financing like equipment loans if they’re available to your business.

Is invoice factoring the same as invoice financing?

It isn’t. Invoice factoring technically isn’t a loan. Instead it’s an advance with a 2-step process that doesn’t involve repayments or interest. When you sign up for invoice factoring, the factoring company typically handles invoice payments from your clients and gives you the funds after your clients pay up.

On the other hand, invoice financing is a secured business term loan backed by your business’s unpaid invoices. You repay it in installments over a set period of time with interest and fees. And you’re still in charge of collecting on your invoices.

Compare invoice financing vs. invoice factoring

Recourse vs. non-recourse factoring

There are two main types of invoice factoring in Canada.

Recourse factoring: According to Canadian small-business financier OnDeck, this is the most common type of invoice factoring in Canada. In this case, the factoring company buys your accounts receivable with the understanding you are still on the hook for any invoices it can’t collect.

Non-recourse factoring: The factoring company assumes all risk for uncollected invoices. Even if the bill goes unpaid, your company is not liable. Since the factoring company takes on more risk in this scenario, the cost is usually higher.

How to apply for invoice factoring?

You don’t really apply for invoice factoring, per se. But you do have to qualify in the eyes of the factoring company. “Getting set up with a factoring company generally takes 7-10 days. It involves filling out an application, submitting some documentation, agreeing on terms, signing a contract and submitting invoices for funding,” says the website of Meritus Capital, a US company that offers such services.

Interest rates

Factoring can be expensive when compared to the cost of traditional lines of credit, says OnDeck. When deciding what to charge you, factoring companies would typically look at how long it has taken your customers to pay invoices in the past, how your company’s invoicing system works, and whether your company has any outstanding tax or legal issues.

“Costs are based on the amount of financing you need and the creditworthiness of your clients. Invoice factoring rates range from 1.5% to 4% per 30 days depending on these criteria,” according to the website of Commercial Capital LLC Canada.

How the process works

The process for invoice factoring is straightforward.

  1. Send the invoice to the factoring company.
  2. The factoring company then pays you the aforementioned 75% to 90% of the invoice’s value.
  3. Your client then pays the invoice to the factoring company (hopefully on schedule).
  4. The factoring company then sends you the remaining cash (i.e. the remaining 10% to 15% of the invoice) after subtracting a fee for the factoring service.

Bottom line

The type of invoice factoring that’s right for you depends on the size of your company, your relationship with customers and how heavily your business relies on invoices for cash flow. Invoice factoring can offer efficiency and value that other business lenders don’t.

But that comes at a price. With invoice factoring you are for the most part letting the factoring company deal directly with your clients. This could affect the customer relationships you have built up over the years. In short, you are giving up some control.

By choosing the best factoring company for your business, you can improve your cash flow and keep your customers happy.

Don’t want to sell your invoices? Explore other business financing options.

Frequently asked questions

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