Invoice financing is a way for businesses to borrow against unpaid invoices. With invoice financing, sometimes called accounts receivable financing, you can get cash out of your accounts receivable before your customers to pay their invoices.

Invoice financing can get you faster access to cash, but this financing option has its downsides. Read on to see how invoice financing works and whether it is a good idea for businesses that need funds.

How Does Invoice Financing Work?

Invoice financing is a term that applies to products that alleviate the financial pressure of waiting for customers to pay their invoices. Companies can use invoice financing to shorten their cash conversion cycle or the time they need to convert their investments in inventory into cash.

“In order to secure the cash required to start the next project while waiting for payment on the last, many business owners obtain invoice financing, which advances cash against outstanding accounts receivable,” says Ben Johnston, chief operating officer of small-business financing company Kapitus. “For many business owners, this is a critical part of their growth strategy and allows them to take on many more projects than they would otherwise have the capital to entertain.”

Invoice Discounting vs. Invoice Factoring

Invoice financing includes both invoice factoring and invoice discounting. The main difference between invoice factoring and invoice discounting is who collects payment from the customer.

Invoice Factoring

With invoice factoring, your company sells control of your accounts receivable to a lender, at a discount, for quick cash. You might receive 70% to 90% of the value of your invoices upfront and the remainder, minus a fee, once customers pay their balances.

The downside to invoice factoring, other than the fee, is that your customers should pay the lender directly. You no longer have control of the collection process, and your customers know you’re financing their invoices.

Invoice Discounting

How Much Does Invoice Financing Cost?

Finance charges will vary based on factors such as the credit quality of your customers, the terms of your invoice finance agreement and market conditions.

“As interest rates have risen throughout the year, invoice financing is becoming more expensive for all businesses,” Johnston says.

The size of your company can also affect the cost of invoice financing.

“Established companies with large, creditworthy customers can often obtain invoice financing from banks at fairly low rates,” Johnston says. “Smaller, less established companies with less creditworthy obligors will likely seek capital from nonbank lenders at higher rates.”

You may be able to get invoice factoring with or without recourse. Factoring without recourse often has higher charges because the risk to the lender is greater.

“Recourse is the practice where the business and invoice finance company agree on the length of time the purchaser will own the invoice before it ‘charges back’ the invoice to the business,” Karas says. “The time is typically 90 to 120 days from the date of the invoice, though terms do vary based on the client’s business model.”

Some lenders offer online calculators to help you determine the potential cost of invoice financing.

What Are the Pros and Cons of Invoice Financing?

Invoice financing might imply that a business is desperate for cash, but that is not always the case. There are pros and cons, depending on your situation, including the following.


It’s possible that ease of access will become a bigger factor in 2023. “Should economic conditions worsen in 2023, as some economists predict, invoice financing will become a practical alternative to traditional bank financing,” Karas says. This is because borrowers would face tighter lending scrutiny from banks. “By focusing on invoice performance, such as collectability and turnover, invoices financing provides working capital in trying times.”


  • Could harm your brand. The type of financing you choose may mean losing control over your invoices and your customer experience. Customers may not appreciate that their invoices were sold to a third party, and poor collection practices could hurt your brand image.
  • Can be risky. There are no guarantees that customers will pay their invoices in full or on time. If they don’t pay, you could still be responsible for repaying the funds.

Where Can You Get Invoice Financing?

Be sure to explore your options and compare costs before making a decision.

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