Table of Contents

  • What Is Invoice Financing for Small Business?
  • How Does Invoice Financing for Small Business Work?
  • Qualifying for Invoice Financing
  • The Cost of Invoice Financing for Small Business
  • Invoice Financing Frequently Asked Questions (FAQs)
  • How to Choose an Invoice Financing Company

Get weekly business insights & expert advice to help grow your business.

For many small businesses, cash shortages can happen while waiting for invoices to be paid. Invoice financing helps you bridge temporary cash shortfalls with instant access to the funds you’re owed.

What Is Invoice Financing for Small Business?

Invoice financing for small business, also known as accounts receivable financing or invoice discounting, converts assets (invoices) into immediate cash. You receive the money you’re owed by your customers right away and pay fees only while the lender waits for your customers to pay off their debts.

In general, invoice financing companies advance businesses up to 80-90% of the accounts receivable value. Until the invoice is paid in full, companies will deduct an overall processing fee and a weekly factor from the reserved portion. 

The remaining balance is then remitted to the borrower in the form of a rebate. 

The financing company typically pays you in two installments:

  • An 80-90% advance of your invoice 
  • The remaining 10-20% (minus fees) once the invoice is paid in full

The Difference Between Invoice Based Financing and Invoice Factoring

Both invoice financing and factoring involve a third-party lender. However, with invoice factoring, the third-party lender purchases your invoices, and assumes the responsibility for collecting payments. 

While invoice financing can happen without customers’ direct knowledge, invoice factoring requires that customers pay the lender directly. The lender also communicates with the customers ahead of the payments. Invoice financing is the better option for a business owner who wants to maintain control of the payment collection and customer communications.

 

Lenders are concerned with your customers’ creditworthiness. Certain invoices will increase your chances of getting financing.

How Does Invoice Financing for Small Business Work?

Accounts receivable financing is based on a simple process: You select the invoices the lender will finance, and you’ll receive a percentage of the money owed. The lender will automatically deduct a fee each week you await full payment. Once the customer pays the bill, the lender will release the rest of your funds — minus the fees.

Let’s take a closer look at this process.

Select Invoices for Financing

You can increase your chances of qualifying for accounts receivable financing if you select invoices based on the following characteristics: 

  • Newer invoices: These invoices are either new or have only recently gone past due (between 30-90 days).
  • Smaller invoices: Small invoices are less of a risk to lenders because the less a company owes, the more likely it is to pay. 
  • Large, creditworthy companies: Unlike other small business loans, invoice financing companies assess the creditworthiness of your clients rather than your business. Knowing that, you should select invoices issued to established companies with strong annual revenues and histories of timely repayment.  

Lender Advances Percentage of Invoice

Once approved, the invoice financing company issues you a percentage of the funded invoices, known as the advance rate. The amount of the advance depends on many factors, including the size of your transaction, your industry and other risk parameters.

Typically, you can expect to receive 80-90% of the financed accounts receivable value.

Factoring Fees Accrue

The invoice financing company deducts a processing fee, typically about 3%, and a fee known as a factor (or invoice discounting rate) each week until invoices are paid in full. 

Invoice Financing Lender Forwards Reserve, Minus Fees

When your customers’ outstanding invoices are paid, the lender issues the reserved balance, known as a rebate, minus the fees.

Qualifying for Invoice Financing

Eligibility for accounts receivable financing is primarily based on your customers’ creditworthiness. However, the health of your business is still relevant and it will influence both the advance you’re offered and the rates you’re assigned. For example:

  • If your revenue has been trending up for 6 months or more, you’ll be considered a stronger candidate and might be offered more favorable terms. 
  • The more accounting history your invoice discounting provider has to review, the better your profile may look. This is especially important for businesses that operate in industries labeled risky by lenders (such as restaurants).

Small business tip: To see how much your offer may cost, use our invoice financing calculator to better understand your terms.

The Cost of Invoice Financing for Small Business

Invoice financing has a straightforward cost structure. 

For example, the invoice financing company charges a one-time processing fee of 3% and a weekly factor of 2% of the total value until the invoice is paid in full. 

If you finance an invoice for $20,000, the cost structure will look like this:

Amount of financed invoice: $20,000

One-time 3% processing fee: $600

1.02 weekly factor rate: $204/week

An invoice financing company advances you 85% of the funded invoice. 

Amount of financed invoice: $20,000

85% advance rate: $17,000

It takes your customer a total of 3 weeks to repay the invoice. As a result, the invoice financing company deducts $1,212 from the reserve amount. 

FeeWeeks to RepaymentTotal
One-time 3% processing fee$600N/A$600
1.02 weekly factor rate $400 per week3$612
Total Invoice Financing Cost: $1,212

The invoice financing company issues a $1,788 rebate. 

 

Reserve$3,000
Total invoice financing cost$1,212
Rebate owed to customer: $1,788

Invoice Financing Frequently Asked Questions (FAQs)

What happens when my customers pay their invoices?

It depends on your lender agreement. There’s typically no change in how your customers pay their invoices. They’ll remit payments to your business entity. You then make payment to your lending provider. However, with some providers, the amount you borrowed is automatically repaid when a customer pays the invoice directly to the lender.

Will my invoice financing provider contact my customers?

No, invoice financing doesn’t require the sale or assignment of your invoices to your provider as is the case in invoice factoring. You maintain control of customer communication, and customer relationships are unchanged.

How to Choose an Invoice Financing Company

An important first step is to research the invoice financing firm to make sure they’re reputable. Check out online reviews on sites such as Trustpilot. Visit the Better Business Bureau’s website to see the business’s rating and if any complaints have been lodged against the company. After you’ve narrowed down your choices, compare the companies’ terms. Make sure you can meet the stated financial requirements.

Additionally, consulting with a trusted advisor is an excellent way to find a reputable firm. 

Applying for accounts receivable financing can be done through an online business lender such as Fast Capital 360. 

You can apply in minutes and find the best accounts receivable financing company for your unique needs. You can be approved within hours and even receive funding as soon as the same day. 

Get weekly business insights & expert advice to help grow your business.