What Is Invoice Financing and Where Can I Get It?

Interruptions to cash flow can make or break a small business. Fortunately, there are numerous financial products available to today’s business owners, such as SBA loans, small business loans and business lines of credit. But if you regularly use invoices to bill your clients, invoice financing may be one of your best options to secure working capital and keep the lights on.

Also known as accounts receivable financing, this lending option allows you to leverage unpaid invoices as collateral against short-term loans. As such, invoice funding can help you manage gaps in cash flow due to unpaid bills.

Of course, as with most financing solutions, it’s important to understand the risks and benefits associated with invoice financing before you move forward. This guide will cover the basics of invoice financing for small businesses and how to choose the best invoice financing company.

In this guide:

• What Is Invoice Financing?
• What are the Best Invoice Financing Companies?
• What Do I Need to Apply for Invoice Financing?
• Invoice Financing for Small Businesses: Which Method Is Best?

What Is Invoice Financing?

Invoice financing is a lending option that allows business owners to use their outstanding invoices as collateral against a cash advance. This secured loan is typically granted to business owners who can prove there is a reasonable expectation of incoming revenue over the next few months.

>> Read More: Secured vs Unsecured Loan: What’s the Difference?

If approved, borrowers can typically expect an invoice loan for 80% to 85% of the total invoice amount. Once the invoices are paid in full, the borrower must repay the loan plus any interest and fees.

There are numerous reasons to consider invoice financing, but typically its best for borrowers who have short-term financing needs. Similarly, businesses that have limited cash flow or expected seasonal shifts can leverage invoice financing to secure a business line of credit to bridge gaps in working capital.

Take, for example, a caterer who needs to replace a broken oven. They are short on working capital but expect payment for several events in the next few months. Using their outstanding invoices as collateral, the business owner can seek a loan through an invoice financer and purchase the oven immediately instead of waiting several months for invoice payment (and potentially turning down new clients).

What are the Best Invoice Financing Companies?

If you’re considering invoice financing, there are several lenders that you may want to consider.

BlueVine

BlueVine is one of the most popular invoice financing companies on the market. It offers invoice loans from $5,000 to $5 million in as little as 24 hours. The lender consistently receives positive customer reviews and has an Excellent Trustpilot score.

• Transparent fee disclosures
• Apply in less than 10 mins
• Advance rates between 85% and 90%
• Choose which and how many invoices to submit
• Only available to business-to-business companies (B2Bs)
• Must have a 530+ FICO

Harper Partners

Harper Partners is another B2B invoice financing company that offers funding up to $5 million—this time with approval in as little as 48 hours. Harper extends flexible financing options to B2B businesses of all types and sizes to assist in each stage of growth and development.

• Minimum credit line of $25,000
• Funds deposited into your account in as little as 24 hours after approval.
• Advance rates between 70% and 90%
• Competitive fees between 1% and 3%
• Great for start-ups
• Approval based on the credit score of the customer, not the borrower

Lendio

Lendio offers a variety of small business financing options, including accounts receivable financing. As an online lending marketplace, Lendio can pair borrowers with the best lenders and lending products based on a variety of factors including industry type, annual revenue, time to funding, and creditworthiness.

• Loan terms up to 1 year
• Advance rates up to 80%
• Factoring interest rates as low as 5%
• As little as 3 days to funding
• No primary credit or revenue requirements

LendingExpress

LendingExpress is a technology-based financing company that uses proprietary algorithms to help small- to medium-sized businesses find the best funding solution. The company works with over forty trusted lending partners and businesses of all types, many of which fund loans up to $5 million.

• Loan terms between 3 and 36 months
• Funds disbursed in as little as 3 hours after approval
• Borrowers must have been in business for at least 3 months
• High approval rates
• Easy online application

FundBox

Fundbox has an A+ TrustPilot rating and offers numerous funding products including invoice lending up to $100k. They currently work with over 70,000 customers and partner with industry leading companies like QuickBooks and Xero.

• 12 or 24-week loan terms
• Advance rates from 60% to 95%
• Receive a credit decision in hours
• Funding as soon as the next business day
• Weekly payments
• Transparent fee schedule starting at 4.66%

>> Read More: BlueVine vs Fundbox

What Do I Need to Apply for Invoice Financing?

Though application requirements vary from lender to lender, most require the following information. Once you have it, you can typically apply online or over the phone.

• General business information, including your EIN or Tax ID
• Banking statements, typically for at least two to three months
• Customer Invoices or accounts receivable

Keep in mind that some lenders will also have minimum credit and revenue requirements, though these too will vary.

Invoice Financing for Small Businesses: Which Method Is Best?

Invoice financing, though a specific form of financing, is also used to refer to any method by which a business owner uses unpaid invoices to secure a loan. Generally, there are two types of financing options: invoice discounting (traditional invoice financing) and invoice factoring.

Although the two are very similar, there are a few significant differences to be aware of before you make your decision.

Invoice Factoring

Invoice factoring is very similar to invoice financing (discounting) in that it results in an advance on a portion of unpaid invoices, typically 85% to 90%. Once invoice payments are made, the borrower will receive the remaining funds, minus factoring fees.

But unlike invoice discounting, factoring requires you to actually sell your invoices to the factoring company, and it will receive payment from your clients directly. Customers are traditionally made aware of the transfer, although some companies, such as Harper Partners, allow your business to remain on the name of the receiving account.

Invoice factoring is typically more expensive than invoice discounting; however, it may be an attractive option for business owners who have invoices that have gone unpaid for 90 days or more, particularly if they don’t want to invest additional time in collection efforts.

Invoice Discounting or Accounts Receivable Financing

Invoice discounting—or accounts receivable financing—adheres to the financing description found at the top of this article.

If using this method, the business owner will receive 85% to 90% of their invoice up front. Once the invoices are paid, the business owner must repay the loan plus any fees or interest.

When entering into an invoice financing agreement, the business retains ownership of the loans, and therefore customers are not made aware of the lending arrangement.

What About Merchant Cash Advances?

A merchant cash advance is a type of invoice financing meant for businesses that regularly deal with credit card transactions, so it may or may not be relevant to your business. Instead of taking out a short-term loan, a merchant cash advance provides funding in exchange for a portion of future credit card sales. 

Invoice Financing vs Factoring: Which Is Better for My Small Business?

While both invoice financing and factoring can result in access to the required funds—and often represent a reliable funding option for business owners with average or below average credit—you may find that one option provides more benefits than the other.

In most cases, invoice financing or discounting is the best option. This method offers more flexibility for the business owner, who maintains control of the client billing process. In addition, since you maintain ownership, your customers don’t have to worry about confidentiality issues or instability in your business.

However, invoice discounting may be more work for you, since you will need to go about collecting repayment on your own.

Invoice factoring, on the other hand, is often an attractive option when you experience habitual payment issues and have been trying to obtain payment for 3 months or more. Because factoring results in the sale of debt, it may be a more efficient method to collect on delinquent payments once and for all and move on — particularly for larger business.

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