How Invoice Financing Works

One of the most frustrating aspects of running a growing business is waiting for your invoices to be paid – especially when some customers don’t pay on time. Yet the money you’ve extended as credit to your customers represents funds you can’t put back to work in your business right away, which ties up your working capital.

But what if you could guarantee you’ll see cash for those invoices?

That’s essentially what accounts receivable financing – also known as invoice financing – can do for your business. While accounts receivable financing can be a fairly expensive way to finance your business operations, it can provide you with more predictable cash flow. This can ease the burden on your business if you’re running short of capital or urgently need to meet other expenses, such as taxes, payroll, etc.

Once you agree to sell an invoice (or invoices) to the financing company, they will advance you about 85% of the total value of the invoice(s). The remaining 15% of the balance will be held in reserve. From this reserve amount, the financing company will collect their first fee (similar to a processing fee, it can be around 3%). Following, the financing company then charges a “factor fee” dependent on the time until the invoice is paid. This is almost always calculated on a weekly basis. For example, a factor could charge 1% each week until the invoice is paid.

You will then receive the reserve amount, minus the total fees accumulated, once your customer pays the invoice.

Although the above example is the norm, there are other types of accounts receivable financing companies that will simply advance you 100% of an outstanding invoice, and you have to pay it back weekly, with fees, over a set period of time – usually around 12 weeks – until the advance is paid off. You’re not waiting for your customer’s payment to settle this debt.


Let’s say you have a $100,000 invoice with 30-day terms. A financing company may immediately advance you 85% of that amount ($85,000), holding $15,000 in reserve. The customer then pays the invoice 2 weeks before the due date. After subtracting the 3% processing fee ($3,000), the financing company would keep its factoring fee, which is 1% per week the invoice was outstanding (in this example that would be 2% or $2,000) and give you the remaining $10,000.

Who Qualifies

Any business that operates a B2B business model can qualify for accounts receivable financing, as long as they currently have outstanding receivables. The maximum amount you can qualify for depends on the total amount and quality of your invoices, as well as your creditworthiness. It is important to note accounts receivable financing companies will pull your credit report.