Invoice Financing

by Gerri Detweiler

What is Invoice Financing?

Invoice financing is a form of asset-based financing and a way for businesses to borrow money against the outstanding invoices from customers. Invoice financing helps businesses improve cash flow, pay employees and suppliers, and reinvest in operations and growth earlier than they could if they had to wait until their customers paid their open invoices in full.

Types of Receivable Financing

Invoice Factoring

Invoice factoring is a common variant invoice financing for small businesses in industries like clothing or manufacturing, where long accounts receivable are part of the normal business cycle. Factoring works by providing a cash advance based on the total value of the unpaid or outstanding invoices. You typically receive 50-80% of the invoice value up front (also known as invoice discounting) based on the risk profile of your clients. You receive the remaining value once the client pays off the invoices, minus a factoring fee. This fee can be structured in any number of ways, but it generally nets out to be about 3-5% of the invoice value

Invoice Financing

Invoice financing for small business is like factoring except that it’s not a sale of your accounts receivable. Invoice financing works by using account receivables as collateral to get the advance and you are ultimately responsible for managing the customer relationships and collecting payment, including late payments. If your customer payments become delinquent, you will be responsible for the amount you advanced. The fees are usually 2-4% of your invoice value per month.

Receivable Based Line of Credit

A receivable based line of credit is a credit line based on a percentage (usually of 80-85%) of value of your outstanding invoices. The value is calculated based on the *aging* of the invoices. Namely, they give a full value for current invoices and a discount for unpaid invoices. You will pay a pre-negotiated interest rate based on your balance. When an invoice gets paid, your balance will be reduced. There’s usually a fee when you draw the credit line. But this is usually a cheaper option than invoice factoring or invoice financing with APR less than 20%.

Invoice Financing Offers

Advertiser Disclosure

Invoice Financing by BlueVine

BlueVine gives small businesses an immediate advance on their outstanding invoices. We help businesses that Learn More

Invoice Financing by Fundbox

Fundbox offers business owners a simple way to fix their cash flow by advancing payments Learn More

What You Need to Know About Invoice Financing

Pros: Cons:
Fast approval, minimal paperwork Relatively high rates
Helps mitigate cash flow emergencies Need invoices as proof/collateral
Transparent, easy-understandable pricing Generally doesn’t work for B2C businesses

Pros of Invoice Financing for Small Businesses

If you’re looking for a fast way to get a short-term borrowing type of financing, invoice financing could be a solid option. Because you’re essentially looking to sell your invoices, the focus is heavy on the invoices themselves. 

This type of small business finance can also help alleviate some of the financial pressure that comes while you wait on tardy customers to pay the invoice. At the same time, the clear terms from the origination fee to the interest rates can make this an easy choice when you’re looking to borrow money.

Cons of Invoice Financing for Small Businesses

The con right off the bat is the high cost of invoice financing. While quick approvals can help you solve financial woes a bit quicker than traditional loans, the overall cost may lose you a little more money in fees, etc. 

The need of invoices as collateral to finance can also be a prohibitive detail to some types of businesses. B2C businesses looking for financial help may be out of luck, especially if their cash flow originates at a point of sale machine rather than long-term invoices. As well, the discount rate you’d receive for your invoices means that you’re essentially losing out on the cost of the full invoice which may have come over time. 

Requirements to Qualify for Invoice Funding: 

Because of the heavy focus on the invoices themselves, almost any B2B business can qualify for invoice financing. If the invoices themselves make sense for the lender to finance, they most likely will. 

The finance amount will depend on the quality of the invoices and your credit history, which you’ll want to review before applying. Be sure, as well, to take a long look to make sure that it makes sense for you to finance your invoices, as it may be costlier than you’re willing to handle over time.

Best Candidates for Invoice Financing:

  • B2B Businesses
  • Seasonal Businesses
  • B2B Businesses with Big, Well-Respected Clients
  • Businesses in Industries with Long Billing Cycles — e.g. Clothing, Retail, Manufacturing, etc.
  • Businesses with Large Invoices and Purchase Orders

Industries that are best suited for invoice funding or financing include:

  • Retail
  • Manufacturing
  • Real estate
  • Healthcare services and medical suppliers
  • Agriculture
  • Marketing services
  • Business consulting and legal services

Invoice funding or financing is not a great fit for business-to-consumer (B2C) companies or subscription-based revenue companies.

How do You Apply for Invoice Financing?

Compared to many small business financing options, the application process for invoice financing, invoice funding, or invoice loans for small businesses is a pretty quick and simple way to get cash for your business. If your chosen lender or financing provider has an online application, all the faster. 

Like with small business loans, your lender will have various requirements for your application, but the unpaid invoices will be the most important. Some may look at your personal credit or business credit or business financials. It’s best to ask before you begin the process to know where you may have the best chance for approval. Some may work better with bad credit, others may be a better fit for younger businesses or those with lower annual revenue, so it’s worth your time to investigate. 

Nav’s verdict:

The overall APR, typically 15-35%, is high compared to that of banks or online term lenders. But it’s a good short-term solution, when most of your short-term assets are tied to accounts receivable, that lets you avoid the lengthy bank loan application for a short-term loan, SBA loan, or other ways you may seek out to get some much-needed cash. It’s also much better compared to expensive merchant cash advances. Your credit score also doesn’t matter as much. Your clients’ credit scores will also be taken into account. Therefore, it’s a good solution if you have receivables but haven’t built up your credit history enough to get a credit line from a bank.

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About Author

Gerri Detweiler

Gerri Detweiler

Credit expert Gerri Detweiler is education director for Nav. She has more than three decades of experience in consumer credit education, has been interviewed in more than 3500 news stories, and answered over 10,000 credit questions online. Her articles have been widely syndicated on sites such as MSN, Forbes, and MarketWatch. She is the author or coauthor of five books, including Finance Your Own Business: Get on the Financing Fast Track. She has testified before Congress on consumer credit legislation.