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AR Discounting in Canada: How It Works, Costs, and Bank Versus Factoring Explained
Receivables discounting solutions in Canada help businesses convert unpaid invoices into immediate cash.
When you do not fully understand a financing tool, it can hurt your cash flow and decision-making.
Let’s break down AR discounting, how this financial transaction works, what it costs, and when Canadian businesses should use it.
Table of Contents
What Is AR Discounting?
The History of Factoring in Business Finance
How Does Receivables Discounting Work?
How Is AR Discounting Different from a Bank Line of Credit?
Can Any Company Qualify for Receivables Financing?
What Does AR Discounting Cost in Canada?
Is Non-Recourse Factoring Available?
Conclusion: Choosing the Right AR Financing Partner
AR discounting: The Hidden Cash Flow Fix You Might Be Overlooking
You know the feeling when sales are strong on paper, but your bank account tells a different story because customers take months to pay. That cash-flow gap creates daily stress, forces you to delay payroll or supplier payments, and makes every new opportunity feel risky.
Let the 7 Park Avenue Financial team show you how AR discounting gives you a practical way to turn those outstanding invoices into reliable working capital, so you can run your business with fewer cash crunches and more control.
What Is AR Discounting?
AR discounting, also called receivables discounting or invoice factoring, is a form of short-term business financing.
It allows you to sell your accounts receivable for immediate cash instead of waiting 30, 60, or 90 days for customer payment.
This solution improves working capital and stabilizes cash flow.
The History of Factoring in Business Finance
Factoring has existed for centuries.
Merchants historically sold trade receivables to finance inventory and shipping.
Today, AR discounting remains a core tool in global commercial finance.
How Does Receivables Discounting Work?
AR discounting is straightforward.
You generate an invoice, and a factoring company advances most of its value immediately.
When your customer pays, you receive the remaining balance, less fees.
Example:
You issue a $100,000 invoice.
The invoice financing company advances 90 percent ($90,000).
Ten percent ($10,000) is held as a reserve.
When your customer pays, the reserve is returned minus the factoring fee.
The reserve protects against short payments or disputes.
The factoring fee is the cost of financing.
How Is AR Discounting Different from a Bank Line of Credit?
This is one of the most common questions people ask
AR discounting is not a traditional bank loan.
It is the sale of receivables, not a loan secured by them.
Bank line of credit:
Requires strong financial statements
Requires consistent profitability
Often requires personal guarantees
Advances a percentage
Advances a percentage of eligible receivables
Imposes financial covenants and reporting requirements
Caps borrowing based on bank formulas
AR discounting / factoring:
Focuses primarily on the quality of your customers
Does not rely as heavily on your profitability
Scales directly with your sales growth
Often has fewer financial covenants
Banks lend against receivables.
Factoring companies purchase receivables.
That structural difference changes qualification, flexibility, and speed.
Can Any Company Qualify for Receivables Financing?
Can startups qualify for AR discounting?
In many cases, yes.
Qualification depends more on your customers’ creditworthiness than your balance sheet.
AR discounting is often suitable for:
Startups with confirmed B2B contracts
Companies in rapid growth mode
Businesses with stretched cash flow
Firms declined by banks
Seasonal businesses
If you invoice creditworthy commercial or government clients, you may qualify.
What Does AR Discounting Cost in Canada?
Cost is the most misunderstood aspect of factoring.
Bank lines of credit are typically the lowest-cost form of financing in Canada.
However, not every company qualifies for bank credit.
Factoring costs vary based on:
Monthly invoice volume
Customer credit quality
Industry risk
Average collection period
Recourse Versus non recourse factoring structure
Fees are usually structured as a discount rate applied to the invoice value.
While factoring costs more than bank financing, it provides:
Immediate liquidity
Scalable funding
No fixed borrowing cap
Faster approval timelines
If your sales grow, your available funding grows with them.
Is Non-Recourse Factoring Available?
Yes.
Non-recourse factoring transfers the risk of customer nonpayment (due to insolvency) to the factoring company.
This structure costs more because the factor assumes credit risk.
There is also confidential AR financing.
With confidential invoice discounting:
You bill your customers directly
You collect payments yourself
The financing remains largely invisible to clients
Most commercial receivables under 90 days are eligible for financing.
Case study: benefits of AR discounting
From The 7 Park Avenue Financial Client Files
Company
ABC Company, a mid‑sized Ontario‑based metal fabrication manufacturer supplying large construction and industrial customers on 45‑ to 60‑day terms.
Challenge
ABC Company faced chronic cash‑flow gaps as receivables grew faster than its traditional bank line.
The company struggled to buy materials in bulk, pay skilled trades on time, and accept new contracts without stretching payables in the supply chain finance solution
Management felt constant pressure, despite strong order books and healthy margins.
Solution
ABC Company implemented an AR discounting facility secured against its receivables, with an advance rate aligned to its top customers’ credit quality.
The company began drawing funds within days of issuing invoices, synchronizing cash inflows with production and payroll cycles.
Internal processes for invoicing, proof of delivery, and aging reports were tightened to maintain eligibility and minimize disputes.
Results
Liquidity improved significantly, reducing reliance on owner injections and emergency short‑term loans.
ABC Company accepted larger contracts from key customers without cash‑flow fear, supporting double‑digit revenue growth.
Supplier relationships improved as payments became timely, leading to better pricing and priority access to materials.
Key Takeaways
AR discounting converts unpaid invoices into immediate cash.
It is not a traditional loan; it is the sale of receivables.
Funding scales with your sales growth.
Qualification focuses on customer credit quality.
Factoring costs more than bank credit but provides faster, more flexible funding.
Non-recourse and confidential options are available in Canada.
Most receivables under 90 days can be financed.
Conclusion: Choosing the Right AR Financing Partner
AR discounting is a powerful working capital solution for Canadian businesses.
It converts receivables into predictable cash flow.
The value of the financing depends on your invoice volume and customer quality.
Call 7 Park Avenue Financial, a trusted, experienced Canadian business financing advisor to structure the right facility.
Clear guidance reduces risk and improves funding outcomes.
FAQ/ FREQUENTLY ASKED QUESTIONS
Who is AR discounting best suited for in Canada?
AR discounting is best suited for B2B companies that sell on credit and issue regular invoices.
It works well for manufacturing, distribution, staffing, trucking, and technology services firms with ongoing receivables.
It is especially useful for high-growth, seasonal, or bank-restricted businesses.
What is the difference between AR discounting and factoring?
AR discounting is typically a loan secured by receivables.
Factoring is usually the sale of invoices to a third party.
With discounting, you manage collections; with factoring, the factor may collect and notify customers.
How does AR discounting work step by step?
You submit an aging report or invoice schedule to a lender.
Why choose AR discounting instead of a larger bank line?
AR discounting focuses more on customer credit quality than your balance sheet ratios.
It is often faster and more flexible than traditional bank financing.
Funding typically scales with receivables, not fixed loan caps.
Where does AR discounting sit in the capital stack?
AR discounting usually acts as a senior secured working-capital facility.
It may replace or complement a bank operating line.
Term loans or equipment financing typically rank behind it.
When does AR discounting make sense for seasonal businesses?
It works well when cash gaps exist between delivery and payment.
Seasonal firms use it to fund payroll and inventory during peak cycles.
Project-based companies draw against invoices instead of waiting for milestone payments.
How much does AR discounting cost compared to bank financing?
AR discounting costs more than prime-based bank lines.
It usually costs less than unsecured alternatives such as merchant cash advances.
Pricing includes a discount fee plus interest on funds drawn.
Why is AR discounting important for high-growth SMEs?
Fast growth increases receivables and strains cash flow.
AR discounting turns unpaid invoices into immediate working capital.
Each new sale can help finance the next one.
How does AR discounting affect financial statements?
If structured as a loan, it appears as a liability secured by receivables.
If structured as a sale, receivables decrease and cash increases.
Treatment depends on accounting structure and lender terms.
Who manages customer communication and collections?
Under AR discounting, your factoring firm usually manages collections.
The lender often remains behind the scenes.
Some facilities may require lockbox or notice-of-assignment structures.
How does AR discounting improve day-to-day cash flow?
It converts invoices into near-immediate cash.
You access funds shortly after billing.
This stabilizes payroll, rent, and supplier payments.
What are the main advantages versus new debt or equity?
It scales with sales and depends on customer strength.
You avoid equity dilution and ownership loss.
Approval is often faster than raising equity or term debt.
How can AR discounting help a growing Canadian manufacturer?
It funds raw materials and production while customers take extended terms.
As receivables grow, funding availability increases.
Growth becomes sustainable rather than cash-constrained.
Why might AR discounting reduce stress for business owners?
Cash becomes predictable after invoicing.
You avoid emergency borrowing.
Planning improves and financial pressure decreases.
How can AR discounting strengthen supplier relationships?
Improved liquidity supports on-time or early payment.
Early payments may unlock discounts or priority allocation.
Stronger trade relationships improve supply-chain resilience.
How are disputes or credit notes handled?
Disputed invoices are typically excluded from eligibility.
Credit notes reduce available borrowing.
Accurate reporting is essential for compliance.
What internal processes should be in place?
Accurate invoicing and proof of delivery are critical.
Reliable aging reports must be maintained.
Strong credit-control procedures support eligibility.
Can AR discounting finance export receivables?
Yes, depending on country risk and buyer credit.
Some lenders require trade credit insurance.
Currency and legal factors affect advance rates.
Why combine AR discounting with inventory or equipment financing?
Receivables fund short-term working capital.
Inventory and equipment loans support operations and expansion.
Combined facilities maximize liquidity.
How should a business compare AR discounting providers?
Compare advance rates, eligibility rules, and total fees.
Review transparency, lock-in terms, and reporting requirements.
Industry experience and customer familiarity matter in Canada.
Statistics - AR discounting / AR financing
Global factoring and receivables finance volumes have reached trillions of dollars annually, indicating widespread use of receivables‑based funding among businesses of all sizes.
Many SMEs report that late payments and long terms are among the leading causes of cash‑flow stress, which is a key driver behind increased adoption of AR‑based financing
Citations
Investopedia. “Accounts Receivable Discounted.” Accessed February 11, 2026. https://www.investopedia.com.
NetSuite. “What Is Accounts Receivable (AR) Financing?” Published December 18, 2025. https://www.netsuite.com.
Accountor CPA. “Accounts Receivable Finance: Definition, Process & Benefits in Canada.” Published March 10, 2025. https://accountor.ca.
Medium/Stan Prokop/7 Park Avenue Financial ."“Takin’ Care Of Business” : AR financing is ‘Working Overtime‘!". https://medium.com/@stanprokop/takin-care-of-business-ar-financing-is-working-overtime-94297789a058
Billtrust. “Defining Accounts Receivable Discounting.” Published August 2, 2025. https://www.billtrust.com.
Service Capital. “Accounts Receivable Financing in Canada – Tool for Healthy Cash Flow.” Published September 29, 2025. https://www.servicecapital.ca.
7 Park Avenue Financial ." Confidential A/R Finance: Smart Working Capital" .https://www.7parkavenuefinancial.com/factoring-confidential-ar-finance.html
