Accounts Receivable Financing in Canada: How It Works and When Factoring Is the Better Fit

Accounts receivable financing is a broad label for any arrangement that turns your unpaid invoices into cash before your customers pay. In Canada, it shows up in two distinct forms: a loan or line of credit secured by your receivables, and invoice factoring, where you sell the receivables outright. The two solve the same cash flow gap, but the mechanics, costs and accounting treatment differ enough that choosing the wrong one can mean overpaying or locking up collateral you need elsewhere.

Key takeaways

• An AR line of credit is debt: you borrow against your receivables, keep ownership of the invoices and stay responsible for collecting them. Factoring is a sale: the factor buys the invoices and typically handles collection.
• Factoring approval rests mainly on your customers’ credit, which makes it accessible to newer businesses. An AR line of credit depends more on your own financial history and the overall quality of your receivables ledger.
• Both products scale with your sales, but factoring grows invoice by invoice while an AR credit line adjusts its borrowing base periodically.
• 27% of Canadian SMEs requested trade credit financing in 2023, which gives a sense of how common receivable-based cash flow gaps are across industries.

Item	AR line of credit	Invoice factoring
Structure	Loan or revolving credit secured by receivables	Sale of individual invoices to a factor
Invoice ownership	You keep it	Factor buys it
Collection	You collect from your customer	Factor usually collects
Balance sheet	Appears as debt	No debt recorded (receivable is removed)
Approval basis	Your credit, financials and receivables quality	Your customers’ creditworthiness
Cost structure	Interest rate on the drawn amount	Percentage of each invoice’s face value

How an AR line of credit works

A lender reviews your accounts receivable ledger and sets a borrowing base, a percentage of your eligible receivables that you can draw against at any time. Eligible receivables typically exclude invoices older than 90 days, disputed amounts and related-party balances. As your customers pay their invoices, the borrowing base adjusts and you draw or repay accordingly.

The lender registers a security interest against your receivables under your province’s Personal Property Security Act (PPSA). That registration gives the lender priority if your business defaults. It also means other lenders can see the lien, which may limit your ability to pledge those receivables elsewhere.

You remain responsible for collecting. Your customers usually do not know a lender is involved, since the arrangement is between you and the lender. Payments continue to flow through your bank account.

What it costs

An AR line of credit charges interest on the amount you actually draw, much like a standard business line of credit. The rate depends on your credit profile, your industry and the quality of your receivable book. With the Bank of Canada policy rate at 2.25% as of October 2026, bank prime sits a few percentage points above that, and the spread on an AR facility will add more depending on perceived risk.

Some lenders also charge an administration or monitoring fee to cover the ongoing review of your receivables ledger. These fees are generally deductible as business expenses in the year you pay them.

How invoice factoring works

With factoring, you sell individual invoices to a factoring company. The factor advances the majority of each invoice’s face value to your account, then collects from your customer on the original payment terms. Once the customer pays, the factor remits the holdback (the portion it kept in reserve) minus its fee. For a detailed walkthrough, see our guide to invoice factoring in Canada.

The factor takes ownership of the receivable. In most Canadian factoring arrangements, the factor notifies your customer that it now owns the invoice and should receive payment directly. Confidential (non-notification) arrangements exist but cost more.

Because the factor is buying a specific invoice, approval turns mainly on the creditworthiness of the customer named on that invoice. Your own business credit matters less. This makes factoring accessible to startups and companies with limited financial history, as long as they invoice reliable commercial or government customers.

What it costs

Factoring fees are quoted as a percentage of the invoice’s face value, not as an interest rate. The fee accrues for each period the invoice stays outstanding. The total cost depends on how quickly your customer pays and on the fee structure the factor uses: flat monthly, tiered, or per-day. Our guide to comparing factoring companies walks through how to evaluate those schedules side by side.

Factoring fees are generally deductible as a business expense in the year incurred.

When an AR line of credit fits better

An AR line of credit tends to suit businesses that have an established financial track record and a diverse receivables book. Banks and asset-based lenders look at your overall ledger rather than individual invoices, so the facility works well when:

• You have a mix of customers rather than one or two dominant accounts.
• Your invoices are generally paid within terms and disputes are rare.
• You want to keep the arrangement invisible to customers.
• You already have a banking relationship and want to keep receivable financing within that relationship.
• You need ongoing revolving access rather than per-invoice advances.

The trade-off is that qualification is harder for newer businesses. Lenders want to see financial statements, consistent revenue history and a clean receivables aging. The overall debt financing approval rate for Canadian SMEs was 90.9% in 2023, but businesses with shorter track records or weaker credit scores fall below that average.

When factoring fits better

Factoring suits businesses that invoice creditworthy commercial or government customers on 30 to 60 day terms but need the cash sooner. It tends to be the better choice when:

• Your business is newer and does not yet have the financial history a bank wants to see for an AR credit facility.
• A small number of large, creditworthy customers make up most of your receivables (construction subcontractors billing a general contractor, for example, or a staffing firm invoicing a national retailer).
• You want the factor to handle collections so your team stops chasing payments.
• You are growing fast and need funding that scales automatically with each new invoice rather than waiting for a periodic borrowing base recalculation.

Canada’s factoring market grew 20% in 2024, partly because more businesses recognized the accessibility advantage: the decision rests on the customer’s credit, not theirs.

Pro tip: If you are unsure which product fits, start by listing your top ten customers and how long each takes to pay. If most are creditworthy and pay within net-60, factoring is straightforward to set up and gives you a quick read on costs. You can always layer an AR line of credit on top later once your financial statements are strong enough to support one.

Side-by-side cost comparison

Because the two products price differently, comparing them requires converting both to the same basis. Here is a simplified example using a $50,000 invoice paid in 45 days.

	AR line of credit	Invoice factoring
Amount accessed	$40,000 (80% of invoice)	$42,500 (85% advance)
Cost basis	Interest on $40,000 for 45 days	Fee on $50,000 face value for 45 days
Illustrative cost	Interest at prime + spread	Percentage of face value per 30-day period
Who collects	You	Factor
PPSA registration	Yes	Yes (factor registers against purchased receivables)

The exact rates depend on your profile and the provider’s terms. The point is that a factoring fee applied to the full invoice face value and a lending rate applied to the drawn balance are not directly comparable without doing the arithmetic on your actual invoices.

Tax treatment

Both products create deductible business expenses under CRA’s general rule that you can deduct any reasonable current expense you incur to earn income.

• AR line of credit: Interest on the borrowed amount is deductible. Arrangement and administration fees may be deductible over five years at 20% per year if they relate to setting up the facility, or in full in the year paid if they are ongoing service fees.
• Factoring fees: Deductible as a current operating expense in the year you pay them.

Confirm the treatment with your accountant, especially if the amounts are material.

How CBL Financial can help

CBL Financial arranges invoice factoring for Canadian businesses across industries, with funding up to $1,000,000 and advances that can move in as fast as 48 hours. If you are not sure whether factoring or another structure suits your situation, apply online or use the equipment financing calculator to explore term-based options alongside receivable financing.

Frequently asked questions

Is accounts receivable financing the same as factoring?

Not exactly. “Accounts receivable financing” is a broad term that covers any arrangement using your receivables to access cash. It includes both AR-secured loans or lines of credit (where you borrow against receivables) and invoice factoring (where you sell receivables). The two have different mechanics, costs and qualification requirements.

Will my customers know about the financing?

With an AR line of credit, usually not. The lender secures the arrangement through a PPSA registration, but your customers continue paying you as normal. With factoring, most Canadian facilities are disclosed: the factor notifies your customer to pay it directly. Confidential factoring arrangements are available but cost more.

Can a startup qualify for accounts receivable financing?

A startup with limited financial history will find it difficult to qualify for a bank AR line of credit, since lenders want to see established revenue and clean financials. Factoring is more accessible for newer businesses because approval depends mainly on the creditworthiness of the customers on your invoices rather than your own financial track record.

How much of my invoice value can I access?

AR lines of credit typically advance between 70% and 90% of eligible receivables. Factoring advances vary by provider and industry but commonly fall in a similar range. The balance comes to you (minus fees) once your customer pays. For details on comparing advance rates, see our guide to comparing factoring companies.

Does accounts receivable financing add debt to my balance sheet?

An AR line of credit does, because it is a loan. You record both the drawn amount and the liability. Factoring does not add debt because it is structured as a sale of the receivable: the invoice is removed from your books and replaced by cash, with the holdback recorded as a short-term asset until the customer pays.

What industries use accounts receivable financing most?

Any industry that invoices other businesses on net-30, net-60 or net-90 terms. Construction subcontractors, staffing agencies, manufacturers, transportation companies and professional services firms all use these products. The common thread is reliable commercial or government customers who pay on terms rather than at the point of sale.

General information, not financial advice.