Factoring is selling your invoices to a lender at a discount. The cash arrives in days instead of months, and the discount is the price of the speed.
How the pricing actually works
A factor quotes a discount rate per 30-day period — say 2 percent. On a $50,000 invoice, that is $1,000 per month outstanding. If your customer pays in 45 days, you pay roughly $1,500. The effective annualized rate is ferocious (over 20 percent), which is why factoring is a bridge, not a habit.
Most factors also charge setup and per-invoice fees, and hold a 10 to 20 percent reserve until the invoice is paid. Model the all-in cost, not the headline rate.
Recourse changes everything
With recourse factoring — the common, cheaper form — if your customer does not pay within the agreed window, the factor returns the invoice to you and you owe the money back. Non-recourse factoring costs more but hands the credit risk to the lender.
Non-recourse makes sense when your concentration risk is real (one customer is half your revenue), but most Canadian factors price it only slightly above recourse, making the comparison worth doing every time.
Who it suits
Factoring is a business-to-business tool: it works when you invoice creditworthy companies or governments and wait 30 to 90 days to be paid. It is not for consumer businesses, and it is not for companies whose real problem is unpriced growth rather than collection timing.
Frequently asked questions
Does the customer know?
In notification factoring, yes — payments go to the factor's account. Silent or non-notification factoring exists but costs more; many customers care less than founders expect.
Factoring vs a line of credit?
A bank line is cheaper and should be the first try, but it is priced against your balance sheet and is hard to get young. Factoring is priced against your customers' credit, which is why startups can get it at all.
Sources
Connectica provides information only, not financial, investment, legal or tax advice. Figures on this page are estimates and generalizations — confirm anything that matters with the relevant professional or authority.