Invoice financing, sometimes called accounts receivable financing, is a form of asset-based financing in which business owners receive an advance of capital in exchange for their unpaid invoices. Typically, invoice financing companies can advance you up to 85% of the value of your invoices and you receive the remaining 15% (minus fees) when your invoices are paid.
Because the invoices themselves serve as collateral on the capital you borrow, invoice financing is often easier to qualify for than other types of small business loans. In this way, invoice financing is a great funding option for B2B and service-based businesses—as it alleviates cash flow problems due to unpaid customer invoices.
|Max. Advance Amount
|Up to 100% of invoice value
|Until the customer pays the invoice
|Approx. 3% processing fee, plus factor fee (~1%) each week until invoice is paid
|As little as 1 day
Invoice financing is a form of asset-based financing in which you receive an advance of capital for your unpaid invoices. This is different from many business financing products, which are structured as term loans—meaning you receive a lump sum of capital that you pay back, with interest, over time.
Although it’s possible to receive up to 100% of the value of your unpaid invoices, most invoice financing companies will advance you up to 85%, holding the remaining 15% until the invoices are paid.
When your customer pays the invoice, you receive the remaining 15%, minus the lender’s fees. Typically, you’ll be charged a processing fee (about 3%), as well as a factor fee. The factor fee, usually about 1% to 2%, is charged on the total value of the invoice for each week it takes the customer to pay.
With invoice financing, you pay for fast and immediate access to your capital, freeing up your cash flow that’s being held up in unpaid invoices.
Invoice financing costs may range from 10% to 60% in estimated APR. Here’s an example to give you a better sense of how expensive invoice financing can be an example:
Let’s say you have a $100,000 invoice with payment due in 30 days.
You find a financing company that’s willing to advance you 85% of that amount—$85,000—and hold the remaining $15,000 in reserve.
The company is going to charge a 1% factor rate for each week it takes the customer to pay the invoice, as well as a 3% processing fee. In this case, it takes the customer two weeks to pay the invoice, so you’ll be paying 2% in factoring fees ($2,000), plus the 3% ($3,000) processing fee.
Therefore, of the $15,000 held in reserve by the financing company, you’ll only receive $10,000 ($15,000 – $5,000 in fees). All in all, invoice financing would have cost you $5,000 of the original invoice amount, which equals an estimated APR of roughly 70%.
Now, that may seem like a steep price to pay, but ultimately, that comes down to your business’s financials and if that amount is worth early access to your capital.
There are a few variations of invoice financing, including invoice factoring and accounts receivable lines of credit.
Invoice factoring and invoice financing are often used interchangeably; however, there are differences between these two types of funding.
With traditional invoice financing, you pay back the advance of capital you borrowed, plus fees. With invoice factoring, you actually sell your invoices to the invoice factoring company at a discount.
In most cases, this also means that the invoice factoring company is the one collecting payments from your customers.
An accounts receivable line of credit is a type of invoice financing in which you use your unpaid invoices to finance a credit line. In this case, the line of credit is backed by your invoices and the amount you receive on the line is usually up to 85% of the value of those invoices.
Unlike traditional invoice financing or invoice factoring, where you’re given a full advance of the value of your invoices, an accounts receivable line of credit lets you draw capital as needed—just like any other business line of credit.
With an accounts receivable line of credit, you pay an interest rate based on your balance, and when a customer pays their invoice, the amount is deducted from your current balance. In addition, some lenders will charge you a draw fee, every time you pull on the credit line.
In most cases an accounts receivable line of credit is like traditional invoice financing (as opposed to factoring), in which you retain ownership of your invoices and are responsible for collecting customer payments.
Of course, as with any type of funding, invoice financing will not be right for every business. First and foremost, by the nature of this business financing, it’s best-suited for B2B and service-based businesses and is often used by those in industries like retail, manufacturing, healthcare, real estate, and consulting.
If you’re trying to decide if invoice financing makes sense for your small business, you can reference the pros and cons below:
Although there are a number of lenders and companies that offer invoice financing, you might start your search with the top options below:
|How to Qualify
Up to $4 million; minimum of $15,000 per month
0.5% to 3% for the first 30 days; maximum of 5%
As fast as two days
500 minimum credit score; ability to factor $15,000 worth of invoices per month
Monthly contracted financing; business owners with lower credit
Up to $15 million
Starts at 0.75% per month
As fast as 24 hours
Specifics not available
Fast funding, flexible solutions including those that accommodate businesses with previous financing issues
Up to $1 million
Starts at 1.2%
As fast as 24 hours
Specifics not available
Larger businesses who can access the most affordable rates
Up to $5 million
Varies based on your invoice volume and contract length/type
As fast as same day, if invoices submitted by cut-off time
No current UCC filings; $50,000 income/month for non-transportation industries
Financing for larger invoices; ability to upgrade to additional products
Invoice financing is much easier to qualify for than other types of business loans. At a very basic level, any small business with a business-to-business model is eligible for invoice financing, as long as they currently have outstanding receivables.
However, some of the requirements that you’ll need to meet for invoice financing will vary based on the individual lender or company. Generally, invoice financing companies will focus on the quality of your invoices, as well as your customers’ repayment history, when determining whether or not you qualify for financing.
Although traditional business loan requirements may not be as important with invoice financing, it’s very likely that lenders will look at factors like your credit score, time in business, and annual revenue. In this case, as with all types of financing, the stronger your business’s qualifications, the more likely you are to access invoice financing with the most ideal rates and terms.
If you think invoice financing can meet your needs, you’ll want to find the right lender and start the application process.
Luckily, invoice financing applications are usually fast and simple, especially compared with more traditionally structured loans, like SBA loans. As we’ve mentioned, because your invoice or invoices will largely determine the amount and terms of the financing you qualify for, your invoices themselves will be the most important part of the application process.
Of course, depending on the lender, you may also be required to submit additional information about your business and finances, such as:
In general, you’ll be able to complete an invoice financing application online, in just minutes. To this end, some companies allow you to connect your business’s accounting software, as well as other tools, to their platform so that they can more easily evaluate your qualifications.
Many invoice financing companies can make you an offer and transfer you funds within a few days.
At the end of the day, invoice financing is an ideal solution for B2B or service-based businesses that are looking to free up cash flow tied in unpaid invoices. Compared to many financing products, invoice financing is generally easy to qualify for and fast to fund—with many alternative lenders offering online-based, streamlined application processes.
It’s important to remember, however, that invoice financing can be expensive, especially when your customers are late to pay. Therefore, before you opt for this type of financing, you’ll want to consider and compare all of your options to ensure that you find the best, most affordable solution for your business.