You sell the invoice, the factor collects it, and you get most of the money up front. The cost is never the headline discount rate on its own — here is how to read the whole agreement.
Key takeaways
Freight factoring is the sale of your freight invoices to a third party at a discount. You deliver the load, submit the invoice with the supporting paperwork, and the factor advances most of the face value once the paperwork is accepted, then collects from the shipper or broker and releases the balance, less its fee. What it costs depends far less on the headline discount rate than on the four or five other terms sitting around it.
Treadstone Law sets out the legal shape of the arrangement in its explanation of how invoice factoring works, which is worth reading before you sign anything, because the agreement decides questions that feel commercial but are not.
Factoring is not a loan against your receivables in the way an operating line is, but personal property security law does not leave it in a category of its own. Under British Columbia’s Personal Property Security Act, “security interest” expressly includes the interest of a transferee arising from the transfer of an account or of chattel paper, “whether or not the interest secures payment or performance of an obligation”. Every common law province has a comparable regime.
Two practical effects follow. The factor will register in the personal property registry, so the registration shows up on any search a lender, an acquirer or a bonding company runs against you. And priority between a factor and an existing lender who already has a general security agreement covering receivables is decided by the registry and by whatever subordination the parties negotiate, not by who funded the load. Treadstone Law explains how a lender perfects a security interest in accounts receivable; if you already have a bank facility, the conversation to have first is with the bank.
Ask for every one of these in writing before you compare two offers:
A discount expressed as a percentage of an invoice is not an interest rate, and it is not comparable to a bank rate until you put time into it. The arithmetic is simple: take the total of everything the factor keeps on a given invoice, divide it by the cash you actually received, then multiply by 365 divided by the number of days between funding and settlement. That gives you an annualised cost you can hold beside an operating line quote.
Parliament takes an expansive view of what counts as the cost of credit, which is a useful discipline even where it does not directly apply. Section 347 of the Criminal Code defines “interest” as the aggregate of all charges and expenses — in the form of a fee, fine, penalty, commission or otherwise — paid for the advancing of credit, and sets the criminal rate at an annual percentage rate exceeding 35 per cent on the credit advanced. Whether that section reaches a particular factoring agreement depends on whether the arrangement is a true sale of receivables or a financing dressed as one, which is a legal question about your document rather than a general rule. The transferable idea is the definition: when you total your cost, count the fees, not just the rate.
A receivable is a “debt security” under the Excise Tax Act — the definitions in section 123(1) describe it as a right to be paid money — and a debt security is a financial instrument. Paragraph (d) of the definition of “financial service” captures the transfer of ownership of a financial instrument, and Part VII of Schedule V makes a supply of a financial service an exempt supply. In practice that means the factoring fee is not a taxable input and there is no input tax credit to claim on it.
What does not change is the underlying freight invoice. You are still the supplier of the transportation service, you still charge the tax the service attracts, and you are still the person who remits it. Selling the receivable moves the money; it does not move the tax obligation.
Almost every factoring problem a small carrier has is a notice-of-assignment problem. Once an invoice is sold, payment has to go to the factor, and the customer has to be told, properly, in writing. If a broker pays you directly because nobody sent the notice or because your remittance details were still on the invoice, the money is not yours — you now owe it to the factor, and the deposit has already been spent on fuel.
Worked example: the payment that went to the wrong place
A three-truck carrier factors its brokered freight but bills two direct shippers on its own account. In month four, a shipper it had always invoiced directly books a load through a broker instead.
The load is factored. The invoice is generated from the carrier’s dispatch system, which puts the carrier’s own bank details in the footer. The broker pays the carrier. Nobody notices for six weeks, because the factor’s ageing report goes to an inbox nobody reads.
When the recourse period expires the factor charges the invoice back. The carrier now owes both the advance and the fee, and has already spent the payment. The fix is structural: one invoice template per funding path, remittance details generated from the funding path rather than typed, and the factor’s ageing report reconciled weekly against the carrier’s own receivables ledger.
Non-recourse arrangements typically cover credit risk — the customer becoming insolvent — and not disputes. A short delivery, a damaged pallet, a missing proof of delivery or a rate disagreement is a dispute, and disputed invoices commonly come straight back to the carrier regardless of the label on the agreement. Read the definition of a credit event in the document you are signing, and read what the factor is entitled to do with your reserve while a dispute is open.
It is generally structured as a sale of receivables rather than a loan, but personal property security legislation still treats the transferee’s interest as a security interest, and whether a particular agreement is a true sale is a question about the document. Get the agreement reviewed before signing.
Expect it to. The factor will register in the personal property registry, and that registration is visible to anyone who searches you — including a bank considering an equipment loan.
Yes. You remain the supplier of the freight transportation service. The tax treatment of the freight is unaffected by who buys the receivable.
Many agreements allow it, and some require you to factor everything. This is one of the terms worth negotiating, because a mixed book is exactly where the notice-of-assignment mistakes happen.
We help Canadian carriers automate the document packet behind every invoice so funding is not waiting on a missing proof of delivery.
