Invoice financing: What it is, how it works, and best options for 2026

What is invoice financing?

Invoice financing, also called receivables financing, allows small businesses to get funding quickly for outstanding business-to-business invoices. In return for fast access to cash, a business pays the invoice finance company a fee, often a percentage of the amount borrowed.

A staffing company has $50,000 in outstanding invoices, but is short on cash. With accounts receivable financing, it could receive $25,000 to $40,000 to pay bills and operate the business until the client pays. While it is more expensive than a conventional bank loan, you can access funds more quickly and with less paperwork.

How does invoice financing work?

To better understand the invoice financing process, follow these steps before deciding whether to use this type of financing for your business.

• Step 1 - Submit your invoices. Review your invoices and select those that you feel meet the lender's criteria. Submit those invoices, and the lender will review the customer's credit to determine how much of an advance you qualify for and what the loan terms will be.
• Step 2 - Receive your advance. Invoice financing advances typically range between 50% to 85% of eligible invoices. The lender can deposit your advance in as little as one business day. The money typically arrives in your bank account as a wire, EFT, or ACH deposit.
• Step 3 - Customer pays the invoice. Your customer pays the invoice according to the original terms of your agreement. Depending upon the type of invoice financing you're using, the customer will either pay you or the lender directly.
• Step 4 - Receive remaining balance minus fees. If you're using invoice factoring, the customer pays the lender instead of sending you the money. Once the lender receives the money, they'll subtract the advance amount and their fees, then send you the remaining balance.

Invoice financing pros and cons

Invoice financing (or accounts receivable financing) has a lot going for it in the right situation, but there are also drawbacks you should consider.

If you’re looking for a fast way to get a short-term type of financing, this can be a solid option. The application and approval process is much faster than with traditional loans, and funds may be deposited in your account in as little as one business day.

The biggest drawback to invoice finance solutions is the cost. While quick approvals can help you solve cash flow issues almost immediately, you will pay for that convenience.

The fact that your collateral is your invoice may mean that some types of businesses won’t qualify immediately. B2C (business-to-consumer) companies 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.

In addition, the cost means you’re essentially missing out on the full revenue from customer invoices, which impacts profit margins.

Types of invoice financing

This table provides a high-level overview of the three main types of invoice financing, how they work, what they cost, and who the client pays.

Invoice factoring

An invoice factoring company purchases outstanding invoices from you at a discount and is responsible for collecting payment on them. You typically receive 50% to 85% of the invoice value up front (also known as invoice discounting) based on the risk profile of the client that owes the invoice. The invoice factoring fee can be structured in any number of ways, but it generally nets out to be about 3% to 5% of the invoice value.

Here's how invoice factoring can work for your business: 

• You have $100,000 of invoices, and the lender determines your advance rate is 60% based on your customers' credit quality. 
• After selling your invoices to the lender, you receive $60,000 up front. 
• As the customers pay off their invoices to the lender, you'll receive the balance minus the lender fee totaling $40,000
• From the $40,000 balance, you'll receive approximately $38,000 after deducting $2,000 in fees (based on a 5% invoice factoring fee).

Invoice financing (loans)

One type of invoice financing allows the business to use accounts receivables as collateral for a short-term loan. This type of loan is the closest to traditional bank financing. You'll receive a lump sum of money upon approval, and you are responsible for repaying the loan, regardless of how quickly (or slowly) the customer pays. Even if the customer never pays, you're still on the hook for what you borrowed.

Invoice financing rates are usually 2% to 4% per month. If you borrow $40,000, you'll be charged fees of $800 to $1,600 per month until you can pay down your balance. With rates this high, it is important to only borrow what you need and to pay off the loan quickly to avoid excessive interest charges.

Receivable-based line of credit

A credit line based on a percentage (usually of 80% to 85%) of the value of your outstanding receivables. The value is calculated based on the aging of the 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 effective APRs that are often less than 20%.

Recourse vs. non-recourse factoring

You may have noticed something interesting above: With invoice financing, it’s you who is ultimately responsible for collecting payment from your clients.

With invoice factoring, the factoring company takes on collection responsibility. Depending on whether the arrangement is recourse or non-recourse, your business may or may not remain liable if the client never pays.

It’s important to understand the difference between recourse and non-recourse factoring or financing. Recourse factoring means the business is ultimately responsible if the invoice is not paid. In other words, you may have to repay the money you received from the factor.

Non-recourse financing means the factoring or financing company is out of luck if the invoice isn’t paid. Note that invoice financing or factoring is not a substitute for debt collection.

Invoice financing costs and fees

Using accounts receivable financing is generally more costly than a traditional bank term loan or line of credit. While this loan type provides quick access to cash, it is important to understand the cost and fees before accepting the loan.

Factor rates and discount fees

For every eligible invoice you submit, you'll be charged a factoring rate or discount fee. These are industry terms for the amount of interest you pay every 30 days. The typical invoice factoring rates vary from 3% to 5% depending on your industry, monthly volume, and the customer's creditworthiness.

Rate structures may vary among lenders. Some lenders charge a flat rate that stays the same, regardless of how long it takes to repay the money. Others have a variable or tiered rate that starts out lower, then an additional fee is added for every 10 days the invoice remains unpaid past the initial term.

Additional fees to watch for

Lenders may charge a variety of fees for invoice financing. Here are a few of the most common fees to watch out for.

• Origination/setup fee. A one-time fee to open your account. These fees are typically less than $500.
• Monthly minimum fees. A fee charged if you don't submit a minimum volume of invoices.
• UCC filing fee. A legal fee for securing the lender's interest in your invoices. These fees typically range between $50 and $200.
• Funding/wire fees. Fees charged for each deposit to your account sent via ACH or wire.
• Late payment fees. Additional fee if you (financing) or the customer (factoring) don't pay on time.
• Credit check or due diligence fees. Fees to underwrite your customers before accepting their invoice as collateral.
• Early termination fees. A fee if you end the invoice financing relationship before an initial term.

How to calculate the true cost

Understanding the true cost of borrowing is crucial before taking on any type of loan. With invoice factoring rates of up to 5%, knowing how to calculate the cost is even more important.

Invoice factoring fees are based on the invoice amount, not the advance that you receive. If you submit an invoice for $50,000 with a 3% fee, the cost is $1,500 for 30 days. To calculate your fee, multiply the rate by your invoice amount.

While a 3% fee may not seem that high for a quick loan turnaround, it is extraordinarily high on an annualized basis. Before signing any loan agreement, use the free Nav business loan calculators to determine the true cost of borrowing.

How to qualify for invoice financing

Qualifying for invoice financing is similar to a traditional bank loan, but it has some very important distinctions. Here's what you need to know about how to qualify.

Business requirements

The business must meet the lender's requirements to be eligible for invoice financing. The time in business varies by lender, but they typically require at least six months. Your business should meet an annual sales volume and agree to a minimum monthly invoice volume that you'll finance. You'll also need to operate in an approved industry that caters to business customers.

Invoice requirements

To be eligible for invoice financing, the invoice must be for completed work for business customers, and your customers must pass the lender's credit requirements. Invoices typically must have net 30 to net 90 day terms, and the invoice cannot be in collections or be pledged as collateral for any other type of loan. Each lender has different criteria for the minimum and maximum dollar amount for individual invoices or the total amount for each batch of invoices.

Credit requirements

While the lender may check your company financials and personal and business credit, they are generally more focused on your customer's credit and ability to pay their invoices. There will most likely be a soft inquiry on your personal credit, which won't affect your credit score.

The lender will use a service such as Dun & Bradstreet (D&B) to assess your customer's creditworthiness and ability to pay the invoice on time. Unlike a personal credit inquiry, lenders can check a company's business credit without their permission. While they may be notified that their credit was checked, your customers won't know the inquiry was related to your application for invoice financing.

Best candidates for invoice financing

While invoice financing is a good option for many businesses, it isn't the right choice for everyone. The best candidates for invoice financing have one or more of the following criteria:

• Invoice other businesses (B2B invoices) for goods or services after they have been delivered.
• Customers are creditworthy businesses.
• In an industry with long billing cycles, such as clothing, retail, manufacturing, etc. 
• Rapidly growing business.
• Clients pay slowly (net-60, net-90 or longer).
• Business is seasonal.

It's also important to understand which businesses are not a good candidate for invoice financing.

• Issue a limited number of invoices.
• Invoices are typically for small dollar amounts.
• Clients are severely delinquent or consistently pay late.

Businesses with good credit and that meet other business lending qualifications may want to consider other lower-cost financing options, such as a business line of credit.

Industries that use invoice financing

This type of financing is very commonplace in a number of industries, including:

• Retail. Financing needed to fulfill large orders and increase inventory ahead of seasonal sales cycles.
• Construction and real estate. Projects often require businesses to pay for labor and materials until reaching milestones.
• Distributors. Longer terms needed for products in transit and while waiting for clients to sell products in stores.
• Manufacturing. Manufacturing needs invoice factoring to bridge the gap between paying for raw materials and labor before shipping product and getting paid by customers.
• Healthcare services and medical suppliers. May require additional time while waiting for insurance companies to process claims and send payment.
• Agriculture. Seasonal business that requires upfront cash for planting, harvesting, and shipping to customers.
• Marketing services. Businesses may need to pay for ad space before client pays the invoice.
• Staffing companies. A seasonal business with a heavy upfront costs for labor.
• Oilfield & gas. May require a long lead time to build wells, sell goods, and collect on invoices.
• Business consulting and legal services. Clients may not pay until the project or case is final.

Most types of businesses that regularly invoice other businesses, but need to get paid more quickly, can be a candidate. However, invoice factoring or financing is typically not a fit for B2C companies or subscription-based revenue companies.

When is invoice financing a good idea?

Invoice financing often makes sense when a business needs to get funding more quickly and can’t qualify for less expensive financing. It may also be an option for small business owners who have a harder time qualifying for financing due to the industry they’re in, time in business, credit scores or other qualifying factors. 

It can also be helpful for businesses that can’t wait weeks or months to get approved and funded for an SBA loan or a traditional small business loan.

Here are a few scenarios where invoice financing makes sense:

• Covering payroll while waiting on large invoice payments
• Taking on new contracts that require upfront costs
• Managing seasonal cash flow gaps
• When you can't qualify for traditional financing

Invoice financing alternatives

If you're unsure whether invoice financing is right for your business, consider these alternatives.

Business line of credit

A business line of credit offers flexible financing with a maximum credit limit. The interest rate is variable, and you only pay interest on the amount borrowed. It offers interest-only payments, but you can pay extra to reduce the balance and future interest charges. As you pay down the balance, you free up available credit that you can use in the future. It is ideal for borrowers with good credit and an established business.

Term loans

A term loan provides a lump sum of cash upfront and a defined repayment period. You'll pay the same amount each month until the loan is paid off. The interest rate is fixed for the duration of the loan. Term loans are ideal for larger funding needs and longer repayment periods.

Merchant cash advance

A merchant cash advance (MCA) offers funding based on your credit card sales. The loan is repaid based on a percentage of your daily or weekly credit card sales volume (typically 10% to 20%). MCA loans tend to be more expensive than other forms of business funding, but new businesses and borrowers with poor credit can get approved when traditional lenders may decline their applications.

Nav's verdict on invoice financing

The overall APR for invoice financing, typically 15% to 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.

Frequently asked questions