Invoice Financing: A Small Business Guide
An ideal solution for B2B businesses that are looking to free up cash flow tied to unpaid invoices.
Last updated Jan. 13, 2025
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 up to 90% of the value of your invoices, and you receive the remaining 10% (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 businesses as it alleviates cash flow problems due to unpaid customer invoices.
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Invoice Financing at a Glance
Max Advance AmountUp to 90% of invoice value
Repayment TermUntil the customer pays the invoice
Fees1% to 5% of total invoice value
Funding SpeedAs fast as 1 day
How Does Invoice Financing Work?
Invoice financing is a form of asset-based financing, in which you receive an advance of capital for your unpaid invoices and the invoices themselves serve as collateral for the loan.
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%-90% of the invoice value. When your customer pays the invoice, you receive the remainder, minus the lender’s fees. Typically, the lender charges a flat fee—between 1% and 5% of the total value of the invoice—for each week it takes your 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 vs. Invoice Factoring
Invoice factoring and invoice financing are often used interchangeably; however, there are differences between these two types of funding.
With 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.
How Much Does Invoice Financing Cost?
Invoice financing costs vary depending on the lender and especially its fees, which, when calculated into an APR, can exceed 75%. Here’s an example to give you a better sense of how expensive invoice financing can be:
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 85% of that amount—$85,000—and hold the remaining $15,000 in reserve.
The company charges a 3% fee for each week it takes the customer to pay the invoice. In this case, it takes the customer two weeks to pay the invoice, so you’ll be paying $6,000 in fees (or $3,000 for each week the invoice went unpaid).
Therefore, of the total invoice amount of $100,000, you’ll receive $94,000 after paying the lender fees. That equals an estimated APR of nearly 85%.
That may seem like a steep price to pay, but ultimately, that determination comes down to your business’s financials and whether such a price is worth early access to your capital.
Pros and Cons of Invoice Financing
If you’re trying to decide whether invoice financing makes sense for your small business, you can reference the pros and cons below:
Pros
✔️ Fast access to working capital. Since invoice financing is backed by your accounts receivable, this type of financing is often very quick to fund, especially when working with alternative lenders who offer an online-based, streamlined application process. You may be able to access funding in as little as one day.
✔️ Alleviates cash flow problems due to unpaid invoices. If you’re running short on capital to meet upcoming expenses, like taxes or payroll, invoice financing gives you the ability to free up cash flow to cover those expenses.
✔️ Easier to qualify for than other types of business financing. Although the requirements you need to meet for invoice financing will vary based on the small business lender, in general, you’ll find that because the financing is backed by your invoices, lenders will be much more flexible with qualifications. Instead of solely focusing on your credit score and financials, lenders will also look at your customers and their payment history.
✔️ Invoices themselves serve as collateral. This not only makes it easier to qualify for this type of financing, but makes it more likely that you won’t be asked to put up other assets, like real estate or inventory, as collateral.
Cons
✖️ Can have higher fees than other types of financing. Overall, the fees you end up paying are often more expensive than you’d find with other types of loans. Additionally, depending on the lender, you might find you have to meet monthly minimums or pay extraneous fees.
✖️ Difficult to evaluate cost upfront. Although you can use an invoice financing calculator to estimate costs to a certain extent, it’s difficult to evaluate exactly how much invoice financing costs ahead of time. Because the final fees you pay are based on the time it takes your customer to pay, the ultimate cost of this financing will vary.
✖️ Can be expensive and risky if customers are late to pay, or don’t pay at all. When it comes down to it, if your customers are late to pay their invoices, this type of financing will end up being very expensive. Some financing companies charge sizable late fees or increase the rates for each week it takes the customer to pay. On the other hand, if your customer doesn’t pay at all, you’ll usually be responsible for repaying the lender in full—which could be detrimental to your cash flow.
✖️ Not really an option for B2C businesses. You need to actually have outstanding invoices to apply for invoice financing. Therefore, if you’re a B2C business or subscription-based business, it’s very likely that this financing won’t be an option for you.
How to Qualify for Invoice Financing
Invoice financing is typically easier to qualify for than other types of business loans. At a basic level, any small business with a B2B model and outstanding receivables is eligible for invoice financing.
However, the specific requirements that you’ll need to meet for invoice financing vary based on the individual lender or company. Generally, invoice financing companies 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 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.
How to Apply for Invoice Financing
If you think invoice financing may meet your needs, then it’s time 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. Because your invoices will largely determine the amount and terms of the financing you qualify for, the invoices themselves will be one of the most important parts 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:
- General business information
- Business bank statements
- Business financial statements, which may include an accounts receivable aging report
- Personal and business credit scores
You’ll likely be able to complete an invoice financing application online, in just minutes. Many invoice financing companies can make you an offer and transfer you funds within a few days.
Fundera Can Help
Curious to see what kind of small business financing you qualify for? Fill out one simple application with Fundera, and we’ll show you your options. This won’t impact your credit score, and there’s no obligation to get your funding through one of our partners.
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