Cash flow is the lifeblood of any business. You can be profitable on paper and still find yourself unable to make payroll or seize a growth opportunity — because the money you are owed has not arrived yet.
Accounts receivable factoring is a financing tool specifically designed to solve this problem. It is widely used by Canadian businesses yet remains poorly understood by many small business owners. This guide explains it clearly.
What Is AR Factoring?
AR factoring is a financing arrangement where a business sells its outstanding invoices to a lender at a slight discount in exchange for immediate cash. Instead of waiting 30, 60, or 90 days for customers to pay, you receive most of the invoice value — typically 80% to 90% — within 24 to 48 hours.
When your customer eventually pays, the lender collects that payment and remits the remaining balance to you, minus a small fee.
A Simple Example
Your business has completed a $50,000 project with 60-day payment terms. You need cash now. Here is how factoring works:
- You sell the $50,000 invoice to a factoring lender
- The lender advances you $42,500 (85%) immediately
- 60 days later your customer pays in full
- The lender remits the remaining $7,500 minus their fee — typically 1%–3%
- You net approximately $49,500 and had use of $42,500 for 60 days
"Factoring is not a loan — you are not taking on debt. You are simply accessing money that is already yours, sooner than your payment terms allow."
Who Benefits Most From AR Factoring
Businesses With Long Payment Terms
If your customers routinely take 30, 60, or 90 days to pay — common in manufacturing, construction, logistics, staffing, and professional services — factoring eliminates that waiting period and smooths your cash flow cycle.
Growing Businesses That Need Working Capital
Growth is expensive. Taking on a large contract often requires upfront investment before revenue arrives. Factoring converts your receivables into working capital immediately, funding growth without traditional debt.
Businesses That Cannot Access Traditional Credit
Because factoring is based on your customers' creditworthiness — not yours — it is accessible to businesses banks would decline. A newer business with strong clients is often an ideal factoring candidate.
AR Factoring vs. Bank Line of Credit
- No debt on your balance sheet — factoring is a sale of an asset, not a loan
- Scales with your revenue — as invoices grow, your factoring capacity grows automatically
- No collateral beyond the invoices — you are not pledging your home or other assets
- Faster access — a bank line takes weeks; factoring can be in place within days
Factoring works best for businesses that invoice other businesses or government on credit terms. The cost — typically 1%–3% per invoice — is often less than the cost of the cash flow problems it prevents.