Factoring: Turn Your Receivables
Into Immediate Cash Flow

You've invoiced the client. The work is done. But the cash won't land for 45, 60, maybe 90 days — and payroll is in two weeks. This is the liquidity gap that quietly chokes growth-stage companies. Factoring (affacturage in French) is one of the oldest tools in corporate finance for bridging exactly this gap. It's worth understanding clearly before you need it.

What Is Factoring?

Factoring is a financial arrangement where you sell your accounts receivable (AR) to a third party — called a factor — at a discount, in exchange for immediate cash. You're not borrowing against your invoices; you're selling them. The factor then collects from your customers directly.

It's a cash flow tool, not a loan. That distinction matters both for your balance sheet and for how you think about the cost.

How the Mechanism Works

1. You issue an invoice to your customer

   Net-30, Net-60, or whatever your terms are. The work is delivered; the invoice is created.

2. You sell (assign) the invoice to a factor

   The factor verifies the invoice is legitimate, checks your customer's creditworthiness, and agrees to purchase it.

3. The factor advances 70–90% of the invoice value

   This hits your bank account within 24–48 hours. The advance rate depends on your industry, customer quality, and your history with the factor.

4. Your customer pays the factor directly

   The factor sends a notice of assignment (NOA) to your customer. Payment goes to the factor, not to you.

5. The factor remits the remaining balance, minus their fee

   Once your customer pays in full, the factor releases the holdback — the remaining 10–30% — less their factoring fee.

The Real Cost: What Percentages to Expect

Factoring fees are typically quoted as a percentage of the face value of the invoice, charged per period (often per 30 days). Here's how it breaks down in practice:

For most SMEs, the realistic all-in annualized cost lands between 20–40% — with outliers on both ends depending on invoice size, customer quality, and how quickly clients pay. To put that in context:

The cost gap is real. But so is the access gap — factoring is often available to companies that can't yet qualify for a bank line. The right comparison isn't the cost of credit; it's the cost of not having the cash. If factoring lets you make payroll, fund a key hire, or take on a contract you'd otherwise turn down, the economics can still work in your favour.

What It Means for Your Balance Sheet

One nuance worth understanding: how factoring appears on your books depends on the structure. Under a true sale (typically non-recourse), the AR is derecognized — it comes off your balance sheet entirely, which can improve certain ratios. Under recourse factoring, many accountants treat it as secured borrowing under IFRS or ASPE, meaning the liability stays on the balance sheet even though you've "sold" the invoice. For SMEs on ASPE, the practical treatment often comes down to whether the risks and rewards of ownership have genuinely transferred. Worth a conversation with your accountant before you sign.

Recourse vs. Non-Recourse Factoring

This is the most important structural distinction in a factoring agreement, and it directly determines what happens when a customer can't or won't pay.

Most factoring in Canada is recourse. Read your agreement carefully. "Non-recourse" often has narrow carve-outs — the protection may only cover customer insolvency, not disputes or non-payment for other reasons.

What Happens When an AR Becomes a Bad Debt?

This is where founders often get caught off guard. The scenario: you've factored an invoice, received your advance, and now your customer is refusing to pay, in financial difficulty, or has gone silent.

Under Recourse Factoring

The factor will charge the invoice back to you. Practically, this means either a deduction from a future remittance, or a direct repayment demand. You now own a bad debt and you owe the factor. Your cash flow position is worse than if you'd never factored at all.

Under Non-Recourse Factoring

If your customer becomes formally insolvent (bankrupt), the factor absorbs the loss — that's what you paid the premium for. However, if non-payment is due to a dispute, you're almost certainly still on the hook. Non-recourse protection is narrower than most people assume.

How Factoring Fits Into Your Cash Flow Strategy

Factoring isn't a substitute for a healthy cash conversion cycle — it's a bridge when your cycle is temporarily stretched. Think of it as one tool in a layered approach:

Before You Factor: Offer an Early Payment Discount

One step worth trying before engaging a factor is a simple early payment discount — offering your customer a small reduction on the invoice in exchange for paying faster than your standard terms. The most common convention is written as 2/10 Net 30: the customer gets a 2% discount if they pay within 10 days, otherwise the full amount is due in 30.

From a cost-of-capital perspective, a 2% discount for paying 20 days early works out to roughly 36% annualized — which sounds expensive, but many well-capitalized customers will take it because it's essentially a guaranteed, risk-free return on their cash. You trade a small margin for immediate liquidity, without involving a third party, without a notice of assignment, and without a factoring agreement.

It won't work for every customer — some large enterprises have rigid AP cycles that won't deviate regardless of incentives. But for growth-stage companies with smaller, more flexible clients, it's often the lowest-friction cash flow lever available. Try it before you factor.

Factoring makes the most sense when your customers are creditworthy but slow-paying; your growth is outrunning your working capital; and you need cash now rather than waiting 60–90 days to qualify for a credit facility.

When Factoring Makes Sense — and When It Doesn't

Factoring is a tool, not a strategy. Used at the right moment, it creates breathing room. Used as a permanent crutch, it can quietly mask deeper problems in your business model.

Good candidates for factoring

Situations where factoring is a warning sign

There are circumstances where factoring shouldn't be the answer — because the problem isn't timing, it's fundamentals.

The chronic use signal

Factoring used occasionally — for a large contract, a seasonal gap, a growth inflection — is a legitimate working capital tool. But if you find yourself factoring continuously, month after month, simply to make it to the next payroll cycle, that pattern is worth examining honestly.

Chronic reliance on factoring often points to one of three underlying issues: a pricing model that doesn't generate sufficient margin to self-fund operations, a cost structure that has grown faster than the revenue supporting it, or collection and billing processes that are losing days on every invoice. Each of those has a real fix — and none of them is a factoring agreement.

What to Watch for in a Factoring Agreement

1. Recourse vs. non-recourse — and the exact definitions

   Understand precisely what triggers a chargeback and what the timeline looks like.

2. Minimum volume commitments

   Some factors require a minimum monthly dollar amount. This can be costly if your AR slows unexpectedly.

3. Notice of assignment requirements

   Does the factor require you to notify all customers? This changes the customer relationship dynamic and should be a deliberate decision.

4. Termination clauses

   How hard is it to exit? Some agreements have lock-in periods or early termination fees that make switching costly.

5. Dispute handling procedures

   What happens if your customer raises a dispute after you've already received the advance? Know the process before it happens.

The Bottom Line

Factoring is a legitimate, well-established tool — expensive relative to a bank line, but often available when a bank line isn't. Used at the right moment, with clear eyes on the cost and the risks, it can preserve momentum in a business that's fundamentally healthy but temporarily cash-constrained.

The discipline is using it intentionally: understand your true cost of funds, know your exposure under a chargeback scenario, account for the administration overhead, and think carefully about what your customers will see when that notice of assignment lands in their inbox.

And if you're reaching for it every month just to make payroll — pause. That's not a factoring problem. That's a business model conversation worth having sooner rather than later.