Small businesses that make money on 30-, 60- or 90-day customer invoices can face a cash crunch while waiting for payment.
If your business needs cash right away to pay for expenses or take advantage of an opportunity, you can turn those outstanding invoices into immediate funding through invoice financing.
Here's what you need to know about invoice financing to determine whether this financial product is right for your business.
What is invoice financing?
Invoice financing — sometimes known as accounts receivable financing — provides small-business owners a cash advance on outstanding invoices, minus fees. Your invoices serve as collateral, and you remain responsible for collecting payment on the unpaid invoices.
Invoice financing is sometimes confused with its close counterpart, invoice factoring.
With invoice factoring, you sell your invoices to a factoring company at a discount. The factoring company pays you a portion of the advance upfront and then takes over collection of the invoices. After the company receives payment from your customer, it sends you the rest of the advance, minus the agreed-upon fees.
In contrast, with invoice financing, you maintain control over the invoices and still deal directly with your customers. You get all or a portion of the money upfront (typically you can expect to receive about 85% of the value of the invoice), then you get the remaining balance, minus the lender’s fees, when your customer pays the invoice.
Invoice financing is usually a better option for businesses that want to maintain control over invoices and deal with their customers directly. Factoring works better if you don’t mind giving up control of invoices and you trust the factoring company to be respectful and professional when dealing with your customers.
Does invoice financing make sense for your business?
Invoice financing works best for businesses that primarily deal with other businesses, known as B2B, since you need outstanding invoices. Direct-to-consumer businesses, like a coffee shop or Etsy shop, typically require immediate payments for services or products.
Because invoice financing is essentially backed by your invoices, it’s easier to qualify for it compared with traditional small-business financing, such as a working capital loan. For example, invoice financing may be an option if you're a startup with bad credit. However, borrowing costs will likely be higher than with other borrowing options.
The quick funding process is also an advantage, especially when you're facing cash-flow issues or an emergency.
You still deal directly with your customers to ensure they pay their invoices on time, but if they're late or miss a payment, an invoice financing company may charge late or higher fees. You face bigger risks if your customer doesn’t make payments altogether.
Find and compare small-business loans
If invoice financing isn't right for you, check out other financing options on NerdWallet’s small-business loans page.
We gauged lender trustworthiness, market scope and user experience, among other factors, and classified lenders into categories that make it easy to find your best options based on criteria that include your time in business and yearly revenue.