It isn’t unusual for businesses to have irregular cash flows. But irregular cash flows combined with limited cash reserves can create problems for both businesses and those who manage them. Growing businesses, in particular, often face this simultaneous challenge, especially those in B2B sectors that rely on credit terms — meaning, customers may have 45, 60 or even 90 days to pay. In situations where stretched-out payment terms create a cash crunch, companies sometimes look to invoice financing to turn their accounts receivables into cash. Invoice financing can offer a good alternative to bank loans or credit lines for companies that can’t readily access those more traditional forms of capital.

What Is Invoice Financing?

Invoice financing is an accounting method that lets businesses borrow against their accounts receivable to generate cash quickly. With invoice financing, a company uses an invoice or invoices as collateral to get a loan from a financing company.

Invoice financing vs. invoice factoring: Invoice financing and invoice factoring are two ways a business can generate cash from unpaid invoices. Invoice financing is similar to a traditional secured loan in that it has set payment terms and interest charges accumulate on outstanding balances, but it uses one or more invoices as collateral for the loan. In invoice factoring, the cash the business receives isn’t in the form of a loan. Rather, a factoring company, AKA a factor, actually “buys” the invoice and assumes responsibility for its collection.

Key differences: While the benefits of invoice financing and invoice factoring are equivalent — namely, the receipt of cash on receivables that are still outstanding — the two methods are structured very differently. The differences include how the financing company charges for its service and which party pursues the customer for payment.

Invoice Financing Invoice Factoring
Invoice ownership Business that creates the invoice continues to own it. Factoring company that buys the invoice becomes its owner.
Invoice collection Usually handled by the business that created it. Usually handled by the factoring company.
Financial company’s fee Financing company charges a percentage each week on the amount of cash advanced, which is considered a loan. There is also often a processing fee. Factoring company purchases the invoices for less than their actual dollar value.
The same financial company might offer both invoice factoring and invoice financing. However, there are some distinctions between the services.

Key Takeaways

  • Invoice financing allows businesses to borrow money against their pending accounts receivable.
  • Businesses typically opt for invoice financing when they are facing a cash shortage or temporary cash-flow problem.
  • Invoice financing is more expensive than traditional bank financing, but it requires significantly less paperwork and can usually be secured much quicker.
  • Invoice financing makes most sense for businesses that have well-known customers who pay their bills on time.
  • It is not an option for B2C businesses; it’s only applicable in B2B sectors.

Invoice Financing Explained

Every company needs cash to fund its operations — to pay for materials, distribution, rent and payroll, to name just a few necessities. Companies with bank loans or lines of credit can take advantage of them during periods of slow cash flow. But companies that need cash quickly or can’t secure a traditional bank loan sometimes turn to receivables financing. In receivables financing, a financial company extends a loan to a business based on revenues earned but not yet collected. For some companies, the cash they receive — often within a day or two of entering into a financing arrangement with a financial company — can provide essential liquidity until they have a more comfortable cash cushion.

Invoice financing works best for B2B sellers that have well-known customers with a reliable payment history. Retail, manufacturing and agriculture companies are among the types of businesses that often turn to invoice financing as a financing mechanism. Invoice financing isn’t an option for companies that primarily sell to consumers or whose payment model is cash-and-carry.

How Does Invoice Financing Work?

An invoice financing arrangement involves three parties: the business that issues an invoice, the customer that receives the invoice and the financial services company. To get the maximum benefit from this type of receivables financing, a business must negotiate terms with the financing company and hope that its customer pays by the due date on the invoice — or earlier.

The following chart captures the main steps in invoice financing.

invoice financing process

How is invoice financing structured?

Invoice financing arrangements have some similarities to short-term loans. In its simplest form, invoice financing would be based on a single invoice, or account receivable. With that invoice serving as collateral, a financial company operating as the lender advances cash to the business that owns the invoice. When the business gets paid, the business sends the original loan amount back to the financial company, along with interest based on the length of time the loan has been outstanding.

How much does invoice financing cost?

Invoice financing is not an inexpensive way to raise capital. A financial company providing cash to a business under this arrangement will typically charge both a single-digit processing fee and a weekly factor fee, also in the single digits. Because of the weekly assessment of the factor fee — so-called because such lenders are themselves known as “factors” — even a low factor fee can result in an annual percentage rate (APR) of 25%, 35%, 50% or even more.

To understand the economics, consider a hypothetical urban design firm looking to raise cash against a $50,000 invoice. A financial company agrees to advance the design firm 80% of the invoice value, or $40,000. In return, the design firm will pay a 0.5% processing fee and a 1.5% weekly factor fee on the cash outstanding. The design firm’s customer pays in four weeks, allowing the design firm to send the financial company the original $40,000 it borrowed plus the $200 processing fee and $2,400 it owes as a factor fee — or $2,600 altogether. The design firm nets $47,400 of its $50,000 invoice.

Types of Receivables Financing

If a business has well-known customers with good credit, its accounts receivables can be used to generate capital during periods of slow cash flow. There are three main types of receivables financing:

  • Invoice financing. In this arrangement, a business goes to a financial company to get a cash advance against one or more outstanding invoices. The cash advance can be for the full value of the invoice, though it is usually somewhat lower.

  • Invoice factoring. This is similar to invoice financing as a way to collect on an invoice prior to its payment. In invoice factoring, however, a factoring company buys the invoice and takes responsibility for collecting payment from the customer.

  • Receivables-based line of credit. This is a credit line that businesses can get using their accounts receivable as collateral. The financial terms are often more favorable than the terms available through invoice financing or factoring. In many cases, though, the dollar volume of invoices needed to obtain the credit line is too high for smaller businesses.

Invoice factoring.

Invoice factoring is similar to invoice financing in that they’re both mechanisms for getting cash quickly, and often the same financial companies will offer both kinds of financing. However, in invoice factoring, the financial company actually buys the invoice from a business and takes responsibility for collection. This has the advantage of relieving businesses from time consuming collections efforts. That said, it also involves the risk of ceding control of an important customer interaction to a third party.

Accounts receivable line of credit.

This is another type of receivables financing that functions like a bank line of credit, but with a business’s unpaid invoices serving as collateral. It can be set up so that the business pays interest only on the money it borrows. AR lines of credit, however, can be difficult to qualify for. Lenders usually require a relatively long-term commitment and a substantial dollar volume of invoices, neither of which are typically options for early-stage businesses.

Pros and Cons of Invoice Financing

Invoice financing can be immensely valuable to companies — allowing them to continue operating during periods of constrained cash flow and to pursue potentially fortune-changing opportunities. But it also has some drawbacks. Management teams should understand both sides before deciding whether to use invoice financing.

Pros: Invoice financing offers three main benefits that are especially helpful for growing businesses, which may face certain challenges due to their early stage of development and limited resources.

  • Fast cash. In certain businesses, it is not unusual for companies to be flying high from the perspective of sales and profit but struggling with cash flow. Invoice financing allows B2B companies to get advanced cash, sometimes within 24 hours, on revenues they’ve earned but have not yet collected. In these circumstances, invoice financing can reduce an owner’s about cashflow and allow management teams to proceed with important initiatives that they would otherwise have to forgo.

  • Highly valuable in an emergency. Natural disasters that result in damaged inventory, a disruption involving a key supplier or the bankruptcy of a key customer — developments like these can quickly put companies in survival mode. If a business finds itself facing one of these existential threats and doesn’t have a lot of money in the bank, the rapid cash provided by invoice financing can be company-saving.

  • Relatively light-touch approval processes. Many young and growing companies don’t have the necessary credit ratings to secure bank loans and lines of credit. This doesn’t matter as much to companies that provide invoice financing because they are more concerned about the credit rating of company’s customers than about the business itself. A business applying for a cash advance on its invoices will typically face less paperwork and fewer questions.

Cons: Against these advantages, companies should consider the three main disadvantages of invoice financing:

  • High cost. Invoice financing is a relatively expensive way to raise capital. The processing fees and weekly interest, or factor, rates can result in APRs that are multiples of what a business would ordinarily pay for a bank loan.

  • Unpredictability of ultimate cost. It isn’t just that invoice financing is more expensive than many traditional forms of finance. A related problem is that when it enters into an invoice financing arrangement, a business generally doesn’t know what its final cost will be. The ultimate cost often depends on how quickly a customer pays the invoice. A longer-than-contracted delay in payment can wipe out any profit from a sale.

  • Limited applicability. Not all businesses are able to use invoice financing. For its use to make sense, a business must be in a B2B sector. It must also have customers with excellent credit ratings and a history of paying on time.

Invoice Financing Example

It is the first day of the month, and Nippity-Doo-Dah, a hypothetical maker of winter apparel, has just fulfilled a $200,000 contract for finished clothes with a retail chain. It is aware that the delay in payment — the retailer’s payment terms are 30 days — is going to leave Nippity-Doo-Dah short of cash for other operating needs. So, after sending the invoice to the retail chain, Nippity-Doo-Dah’s next step is to approach a company that occasionally finances its invoices.

The financing company says it can wire Nippity-Doo-Dah 80% of the invoice value, or $160,000. The processing fee for the loan is 2%, and the factor fee — similar to an interest rate — will be 1% a week until the invoice is paid. The retailer actually pays 21 days after receiving the invoice, meaning Nippity-Doo-Dah will pay 3% interest on the $160,000. Altogether, Nippity-Doo-Dah’s owner owes the financing company $8,000 — $3,200 for processing plus $4,800 in interest. With the payment in hand, the apparel maker wires $168,000 to the financing company. After deducing financing charges from the invoice amount, Nippity-Doo-Dah brings in $192,000 from the retailer.

Day 2 Day 21 Day 28  
What happens Nippity-Doo-Dah receives 80% of the $200,000 invoice value from its financing company. This is basically the principal on the short-term loan. Nippity-Doo-Dah receives retailer's payment. Nippity-Doo-Dah returns loan values to finance company, along with the processing fee and 3% total factor fee. How much Nippity-Doo-Dah nets from the $200,000 order:
Cash flow +$160,000 +$200,000 -$168,000 N/A
The green and red dollar figures show the direction and amount of cash flow in the case of a hypothetical company financing a single large invoice. The financing deal results in the company getting $8,000 less than it otherwise would have. Some companies consider the fast cash worth the expense.

How to Qualify for Invoice Financing

To qualify for invoice financing, a business should have accounts receivable from creditworthy customers that have a history of paying invoices promptly. A business should also understand that its own credit score and business fundamentals will likely be looked at, even if they aren’t the financing company’s main concern. An owner with a poor credit score might have trouble getting approval from certain financial companies. In other cases, a low credit score will result in higher payments and fees.

How to Apply for Invoice Financing

The process begins with a business filling out an application, often online, and sharing details about the invoices it wants to finance. The businessperson who is handling the application will have to show some form of identification, which could be a driver’s license. It is usually necessary for the company to submit other documentation as well, such as avoided business check, bank statement or financial statements.

Automate Invoice Financing With NetSuite

NetSuite’s Cash 360 dashboard automates cash flow forecasting and gives companies a better understanding of their near-term cash requirements and how much they're likely to collect. This helps inform decisions, such as whether invoice factoring is required or not. In addition, NetSuite’s embedded SuiteBanking solution gives customers access to a variety of financial services from within NetSuite, allowing them to choose which ones to work with, what information they’ll share, and track the status of their accounts without leaving the application.


Many B2B businesses go through periods of irregular cash flow, especially if they have slow paying customers or offer extended payment terms. Companies that are in this situation and don’t have a flush bank account sometimes end up cash-constrained. If they don’t have access to traditional bank loans or lines of credit, invoice financing can be a good solution. In invoice financing, a company that needs cash fast uses some of its invoices as collateral to secure additional capital from a company that provides short-term financing. Although invoice financing is a relatively expensive way of raising cash, it is often used by growing businesses to cover near-term operating expenses or pursue growth opportunities.

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Invoice Financing FAQs

Is invoice financing a good idea?

Invoice financing can make sense for companies experiencing a temporary cash flow shortfall. It is more expensive than traditional bank financing and is thus most often used by businesses that don’t have access to bank financing in the amounts they need.

What is sales invoice financing?

Sales invoice financing is a form of accounts receivable financing. It describes an arrangement in which B2B companies use their unpaid invoices as collateral to borrow money from financial companies.

What is the difference between invoice financing and factoring?

Both are ways to raise cash quickly using unpaid invoices. In invoice financing, the financial company basically acts as a lender, advancing money to a business while treating the unpaid invoice as collateral. In invoice factoring, the financial company actually buys the invoice and assumes responsibility for collecting on it.