Accounting and Finance

What is Invoice Financing?

by Ben Dwyer

Invoice financing, also sometimes called accounts receivable financing, is a way for small businesses to secure money for outstanding invoices before the client who owes the money pays. It can be a helpful option if you’re strapped for cash, but the costs may not make it a good long-term solution.

Let’s take a closer look at invoice financing and what’s involved.

How does invoice financing work?

Essentially, you’ll partner with a lender who will front you the money for an outstanding invoice and collect a fee. Depending on your arrangement with your lender, you may receive all of the money for an outstanding invoice balance or a portion of the total. The outstanding invoice acts as a form of collateral, making it somewhat less risky to the lender than a traditional loan.

Related article: How to Send Electronic Invoices.

Invoice financing can help with cash flow, providing access to money you’ve earned even if you have a slow-paying client. Some lenders will allow you to pick and choose which invoices you’d like financed, while other companies will require that you send all of your invoices for financing.

Types of Invoice Financing

There are two primary types of invoice financing – one is called factoring and the other is called discounting.

With factoring, you’ll sell your invoices to your lender partner for a percentage of the total and the lender will be responsible for collecting payment from your customers.

With discounting, your lender will provide an upfront payment to you for outstanding invoices, but you’re responsible for collecting the payment from your customers. Once your customers pay the invoice, you’ll repay your lender the amount loaned to you and possibly a fee, if it was not already deducted.

Upfront Percentages for Invoices

The actual percentage you’ll receive upfront for an invoice can vary depending on the company and the arrangement into which you enter. For a rough rule of thumb, you can expect to receive between 70-85% of the total. Some companies may offer more or less, depending on your specific needs and invoices. ZipBooks, for example, claims to offer 100% of invoice totals upfront, though the company will initially limit the size of invoice you can submit.

Even if you do choose a company that offers 70-85%, remember that this doesn’t mean you won’t see the other 15-30%, but that you’ll have to wait until the invoice is paid for the remainder.

Once the invoice is paid, you’ll pay back your lender the amount that was provided upfront and a fee for the financing. Some companies may also offer longer term repayment options.

Who should consider invoice financing?

Any company that bills clients via invoices could be a good candidate for invoice financing. Examples include IT companies, professional services, and B2B businesses. Whether it’s right for your business will depend on a number of factors, including your cash flow needs, speed of customer payments, ability to access other forms of short-term funding, and more.

Businesses that offer long terms on invoices or have clients that are typically slow to pay may be particularly well-suited to invoice financing, but it’s worth considering all your options. You may be able to turn to business lines of credit for similar short-term cash needs without paying the fees associated with invoice financing.

Costs for Invoice Financing

How much does invoice financing cost, you ask? Unfortunately, there’s no one answer to that question. Some invoice financing companies advertise a monthly percentage while others quote weekly. Other lenders may have monthly fees, ACH fees, or security fees in addition to per-invoice charges.

Some lenders, like PayPlant, specify “starting rates” of 1.2% per month, but don’t give you the exact rate you’ll pay until you complete an application. Other companies, like ZipBooks, advertise 0.5% per week, claiming that is the only charge.

As with anything for your business, be sure to get a full quote in writing and go through it carefully. There are often fees to consider beyond just “rates” for invoice financing. Those fees can quickly add up to an expensive solution.

Finding a Lender

Choosing the right lender for invoice financing can take a little bit of research. In addition to independent financing companies, some accounting programs like ZipBooks offer invoice financing. If you already use a specific program, start there to determine if it will be a fit for you.

You should first decide if you’re willing to submit all of your invoices to a financing company, or if you want the ability to choose only certain invoices, sometimes called “spot factoring.”

Once you’ve decided on that, you can narrow down your options and begin contacting lenders.

Be sure to ask about:

  • Fees per invoice financed
  • Monthly fees or monthly minimums
  • Contract length
  • Cancellation fees for contracts

You should also ask about whether you or the lender will be responsible for collecting payments from your customers. Keep in mind that if the lender collects payments, your customers will know about the arrangement, which can potentially affect their opinion of your business. If you don’t want the lender contacting your customers, be sure to choose a company that leaves collection to you and offers financing without notifying your customers.

Invoice Financing vs. Merchant Cash Advances

Some businesses turn to invoice financing if they’re not eligible for other types of funding, such as small business loans. Invoice financing may be easier to obtain than traditional loans, but can also have higher costs. This is also true for merchant cash advances.

Invoicing financing and merchant cash advances share some similarities in that they’re both ways to obtain capital without taking out a traditional loan. However, where invoice financing involves receiving a specific sum against invoices, merchant cash advances refer to a company that lends you money against your future credit card sales.

With invoice financing, you’ll repay the money once your customer pays the invoice. With merchant cash advances, a percentage of your daily credit card sales will be automatically deducted and applied toward paying back the advance.

Read more about Merchant Cash Advances.


Invoice financing for small businesses can be a helpful temporary tool. However, they may not be a great long-term option, as they can be expensive. If you find yourself in need of invoice financing for a short time, consider lenders without long contracts. If your business constantly requires invoice financing to stay afloat, consider looking into your margins, net terms, and other variables to see if you can adjust your policies to help your cash flow while still meeting the needs of your customers.

Related article: Calculating Margin.

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