Invoice Factoring in Ontario: How It Works and What You're Agreeing To

Waiting weeks — sometimes months — to get paid on invoices you have already earned can strangle an otherwise healthy Ontario business. Invoice factoring is one common way businesses convert unpaid invoices into immediate cash, but the legal and financial mechanics behind it are easy to misunderstand. Signing a factoring agreement means more than simply "borrowing against your invoices" — in most structures, you are actually selling them.

This article explains how invoice factoring works, what recourse and non-recourse factoring mean, and what to look for before you sign a factoring agreement.

How Invoice Factoring Works

In a typical factoring arrangement:

1. Your business delivers goods or services and issues an invoice to a customer.
2. Instead of waiting for the customer to pay, you sell that invoice (or a batch of invoices) to a factoring company.
3. The factoring company advances you most of the invoice's face value up front, keeping a discount as its fee.
4. The factoring company collects payment directly from your customer when it comes due.
5. Once collected, the factoring company typically remits the remaining balance to you, minus its fee, or the fee is deducted from the initial advance depending on how the agreement is structured.

Because the factoring company is often collecting directly from your customers, factoring is frequently a disclosed arrangement — your customers may be notified to pay the factoring company directly, which is a meaningful business consideration many owners weigh before choosing this route.

Recourse vs. Non-Recourse Factoring

The single most important distinction in any factoring agreement is whether it is recourse or non-recourse.

Non-recourse factoring sounds like it eliminates your risk entirely, but it rarely does — most non-recourse agreements still push risk back onto you for anything other than the customer's straightforward insolvency, such as a dispute over the quality of goods delivered. Read the actual carve-outs, not just the "non-recourse" label.

What You Are Legally Giving Up

• Ownership of the receivable. In most factoring structures, you are selling the invoice, not borrowing against it — the factoring company becomes the owner of that receivable, or at minimum takes a registered security interest under the Personal Property Security Act (PPSA) protecting its priority in it.
• Some control over customer relationships. If the arrangement is disclosed, your customers deal directly with the factoring company on payment, which can affect how your customers perceive your business.
• Margin on every invoice factored. The discount the factoring company takes is the cost of immediate cash — over many invoices and a sustained period, this can be a meaningful ongoing cost of doing business, which is worth weighing against other financing alternatives such as a line of credit.
• Priority position for the factor. Because factoring companies typically register under the PPSA against receivables, a business already carrying a general security agreement with another lender needs to check for conflicts before entering a factoring arrangement.

Questions to Ask Before Signing a Factoring Agreement

• [ ] Is this recourse or non-recourse, and what are the actual carve-outs from non-recourse protection?
• [ ] What is the fee structure, and how is it calculated — a flat discount, a tiered rate based on how long the invoice remains unpaid, or something else?
• [ ] Will my customers be notified, or is this a non-disclosed arrangement?
• [ ] What happens if a customer disputes the invoice after it has already been factored?
• [ ] Does the agreement require me to factor a minimum volume of invoices, and what happens if I fall short?
• [ ] Does the factoring company's security interest conflict with any existing lender's security over my receivables?
• [ ] What termination rights and notice periods apply if I want to exit the arrangement?

Frequently asked questions