Cash flow is something every business will closely monitor. It covers your expenses, helps you find new customers and keep up with—or leave behind—the competition.

It can cause a lot of stress for small business owners, especially those in the B2B (business-to-business) space because of longer billing cycles. The costs are closing in but your money is still weeks out. 

What do you do?

Aside from turning to personal finances or asking friends and family for money, small business owners can consider invoice financing as a way to meet short-term business expenses. 

In this article, we'll cover everything you need to know about invoice financing – including the different types, the pros and cons, and how you can qualify and apply. We’ll also explore an alternative you may not have considered. 

What is invoice financing?

Also called accounts receivable financing, invoice financing is when a company gets a cash advance from a financial institution (e.g. bank) based on unpaid invoices.

Of course, the lender tacks on a fee (usually a % of the loan) for you to pay in exchange for their supply of capital. The unpaid customer invoices serve as proof that you’ll have cash to pay the loan back in due time.

Here are some important things to remember with invoice financing:

  • Recourse factoring vs. non-recourse factoring. With recourse financing, you are liable to pay back the loan to the lending financial institution whether your client pays the invoice or not. However, with non-recourse factoring loans you are not responsible for making payment should your client fail to pay the invoice you have borrowed against. This type of financing is more expensive because the institution is taking a higher risk.

  • Cash advance/processing fees. This is the flat fee a borrower must pay the invoice financing institution to facilitate the cash advance (similar to an origination fee on term loans). It's typically around 3%, and comes out of the remaining 10% - 15% that you collect when balances are repaid.

  • The weekly factor fee. Your total costs for invoice financing is most often based on a weekly basis, ranging from 0.5% to about 3% depending on how long your invoice is outstanding after taking the loan.

  • Lump sum repayment terms. You won't be owing weekly payments on the invoices financed, instead you'll just repay the due balance at once when your client pays you.

  • No additional collateral required. Since your invoices serve as "collateral," you won't need to put up any other valuable assets for stake.

Example of how invoice finance works

Let's say your business needs some quick cash flow to pay for operations, general overhead, and some payroll. But your outstanding invoices of $5,000 aren’t due for another 3 weeks. 

How are you going to pay for all of that now?

To secure invoice financing, you’ll head to your bank and ask for quick access to money and show invoices proving you expect $5000 from clients in the near future.

You agree to pay a 3% processing fee for the cash advance, and an additional 1% for each week it takes you to repay (so another 3%). The bank decides to lend you 80% of the total receivables (0.80 x $5000), so you have $4000 on-hand without waiting 21 days.

Once your customers or clients pay you the $5000, you repay $4300 (+$300 is the 6% in total fees) to the bank.

You will have been able to pay necessary expenses while you waited for better cash flow and the lending institution will have made a profit. Everyone’s happy.

How do small businesses use invoice financing?

At its core, invoice financing can give you access to working capital that's tied up in receivables for a variety of business purposes. 

Below are some of the most common ways a small business will use invoice financing.

  • To even out cash flow fluctuations (especially helpful for businesses with long sales cycles)
  • To take advantage of early payment discounts from suppliers
  • To finance business expansion (e.g. buying, upgrading, or maintaining equipment, more marketing, etc.)
  • To make payroll or pay for other immediate expenses
  • To pay for credit card bills
  • To avoid having to take out a more expensive business loan with interest

Types of invoice financing

Invoice factoring

This is when an invoice factoring company purchases your outstanding invoices at a discount and takes the responsibility off your hands on collecting payment for them.

You'll typically receive 50-85% of the invoice value up front, but this depends on the risk profile of the clients owing invoices.

Of course the invoice factoring fee is generally 3-5% of the invoice value.

While this means less work on your part, your lack of involvement could affect your relationship with your customers, so it's something to keep in mind.

Invoice discounting

A better option for larger businesses who prefer to deal with their customer-base personally.

Your company will put up its unpaid invoices as collateral and keep control over the sales ledger, payment collections, and invoice processing.

Of course once you're paid, it's time to repay the invoice discounting company your dues plus additional transaction fees (2-4% a month depending on how long you take to pay).

Spot factoring

This is a newer solution for businesses who maybe have one-off projects with higher value invoices that they need paid right away. Say you have an invoice for $100,000 due in 30 days but you need the cash now to take advantage of an opportunity - spot factoring can help. With this method, businesses pay higher fees since it's more flexible and lenders don't expect continual business.

Auctioning online

Businesses can also auction off their invoices to the highest bidder in order to get quick cash. It's a little bit like Ebay for invoices, but it's not as well known so there may be fewer bidders and slightly lower bids than if you were to go through a traditional lender.

Selective invoice financing

This is a mix of traditional invoice factoring and spot factoring. Businesses get to choose specific high value invoices that will generate the most return, which is cheaper than financing every invoice since you can shave off fees on lower value invoices.

Who qualifies for invoice financing?

While invoice financing is convenient, it's not for everyone.

The best candidates are B2B businesses, growing businesses and seasonal businesses. 

B2B businesses

If you're predominantly a B2B company that invoices other credit-worthy businesses after goods or services have been delivered, invoice financing is a viable route for dealing with long billing cycles (e.g, SaaS, clothing, retail, manufacturing, etc.).

Growing businesses

If you're a rapidly growing business that needs to expand, you may find invoice financing helpful when doing business with clients that pay slowly (net-60, net-90 or longer).

Seasonal businesses

If you're a seasonal business, invoice financing is again a great cash management tool. You may have made a significant number of purchases throughout the last few months, but you haven't collected on all of them yet. While you wait to get paid, your company still has bills to pay – invoice funding can help you bridge the gap.

Industries suited to invoice financing

Generally speaking, the following industries are best suited for invoice financing:

  • Business consulting and legal services
  • Marketing services
  • Staffing companies
  • Retail
  • Construction & real estate
  • Distributors
  • Manufacturing
  • Healthcare services and medical suppliers
  • Agriculture
  • Oilfield & gas

Who's not the best candidate for invoice financing? Businesses who don't invoice much or who deal with clients with bad credit will have a hard time getting cash advances from invoice financing institutions.

How to apply for invoice financing

Whether you're doing invoice factoring or invoice discounting, it's facilitated through a lender. The invoice financing company in question will evaluate and approve your credentials to set the terms and fees.

A good thing about invoice financing companies is that their paperwork and vetting process isn’t too intensive.

Generally speaking, you can apply for invoice finance business loans with the following documentation in hand:

  • Credit score
  • Basic details about your business (such as your industry and time in business)
  • A couple of months of bank statements
  • Information about your outstanding invoices

Pros and cons of invoice financing

Like with all funding types, invoice financing services aren't for everyone. We learned in a previous section that it's best-suited for B2B and service-based businesses, but that's just a minimum requirement.

There are many other facets of this financing option for you to consider before applying. 

Pros to invoice financing:

  • Faster access to working capital. This is key because it gives business owners the flexibility to reinvest in their company without waiting for customers to finally settle accounts 60 or 90 days down the road. Many companies with longer billing cycles may find it incredibly difficult to grow without this.

  • No "collateral" required. Unlike a bank loan, there's no need to put up any collateral when applying for an invoice cash advance. This is because the funding is backed by your business's outstanding customer invoices.

  • Can improve your company's credit score. If you make all of your payments on time, it will positively impact your business’s credit score.

  • Easier to qualify. Getting an unsecured business loan from a bank can be difficult, especially for newer businesses. Because invoice financing companies are evaluating your customers' creditworthiness instead of yours, it may be easier to qualify.

Cons to invoice financing:

  • Fees and interest rates. Because invoice funding is a form of debt financing, there are fees associated with the service (more on this later). Also, because it's an unsecured loan, the interest rates tend to be higher than other types of business loans.

  • You'll still need good customers. Even though the funding is backed by your invoices, you'll need customers with good credit in order for this to work. If you don't have many high-quality invoices, it could be difficult—or even impossible—to get funding.

  • There's a risk of being locked into a long-term contract. Some providers will lock you into a year-long contract, which means you'll be stuck paying fees even if your business slows down and you don't need the funding anymore.

  • You may still be responsible for collections. One thing to note is that even though the invoice financing company will be responsible for collecting payment from your customers, you may still be on the hook if they don't pay up – that is if you have a recourse factoring agreement that we discussed in the first section.

  • Not a great match for B2C businesses. If you're a business that sells directly to consumers (B2C), you likely won't be able to use this type of financing because your customers' creditworthiness won’t be taken into consideration.

What are the best invoice financing companies?

Now that we've answered the question "what is invoice financing?", it's time to take a look at some of the best providers in the space. The list of invoice factoring companies below is in alphabetical order and not in order of rank.


If you're looking for fast funding, BlueVine could be a good option. They offer both invoice factoring and financing, and they can fund invoices in as little as 24 hours.

BlueVine is a good choice for business owners who want flexibility because they don't have minimum monthly requirements. You can factor as many—or as few—invoices as you want each month. However, keep in mind that the fees will be higher if you factor fewer invoices.

BlueVine is also one of the few providers that offers advances on future invoices. This can be helpful if you need funding for a big project but don't have the invoices yet to back it up. The downside is that there's no grace period – you'll start accruing interest as soon as the advance is funded.


Fundbox is a good option for business owners who need fast funding but don't have many (or any) invoices to factor. That's because they offer lines of credit instead of invoice financing.

With Fundbox, you can borrow against future invoices, which can be helpful if you need funding for a big project but haven’t issued invoices yet. The downside is that there's no grace period – you'll start accruing interest as soon as the advance is funded.

One thing to note about Fundbox is that they have a minimum monthly repayment requirement. If you don't repay what you've borrowed (plus fees and interest) within 12-24 weeks (+3-day grace period), you'll be charged a penalty.


Nav is a good choice for business owners who want to avoid long-term contracts. That's because they don't have any minimum monthly requirements and they don’t issue long-term contracts. You can factor as many or as few invoices as you want each month.

However, the fewer invoices you factor the higher your fees will be.

Another thing to note about Nav is that they offer a line of credit in addition to invoice financing.

As mentioned, this can be helpful if you need funding for a big project but don't have the invoices to back it up yet. Again, the downside is that there's no grace period – you'll start accruing interest as soon as the advance is funded.

Alternative financing options

Invoice financing isn’t the only option you have when financing your short-term business expenses with quick cash flow. Revenue-based finance is a funding option many small businesses turn to for quick access to cash and easy approval processes. 

Similar to invoice financing, revenue-based financing looks towards your future income. You’ll repay the loan monthly with a percentage of your future revenue until it’s paid in full.

It's a shorter application than invoice financing and you don't need to show proof of unpaid invoices, though you’ll need to show a proven track record of recurring sales and steady growth. It’s well suited to e-commerce and SaaS companies.

Lenders like Uncapped can offer between $10k-$5M within 24 hours. Speak to an expert to find out how you can get a no-interest, no-equity loan to fund your marketing, inventory, or hiring-related needs among other things.