Your business invoices clients with a billing cycle that lasts between 30 to 90 days. The long cycle leaves you waiting for important working capital that you need for daily operations. If this is your story, invoice financing or factoring may help bridge the gap in cash flow.

Both types of financing use unpaid invoices and your clients’ payment history to approve the funding. Both are also welcoming if you need a business loan with bad credit. But there are key differences and features to consider when deciding between invoice factoring versus financing.

Key takeaways

  • Invoice financing uses your unpaid invoices as collateral to secure financing
  • Invoice factoring sells unpaid invoices to a factoring company
  • With invoice factoring, a business gives up control of the payment collection process
  • Both financing and factoring are useful for short-term financing needs but may come with heavy fees

What is invoice financing?

Invoice financing is an alternative business loan that approves funding based on your business’s unpaid invoices. The invoices act as a form of collateral telling the lender that you can pay the loan when invoice payments come in. Since the loan uses your accounts receivable for approval and to determine the loan amount, this financing is often called accounts receivable financing.

How does invoice financing work?

When applying for invoice financing, you start by showing unpaid invoices for work or services already provided to a financing company. The lender approves the funding and loan amount by reviewing your clients’ payment history, weighing their credit more heavily than your own.

Next, the lender advances you up to 90 percent of the unpaid invoices. You pay back the lender when your clients pay you, plus financing fees. Fees may be charged as a percentage of the loan amount or as a weekly percentage that gets higher each week the invoices remain unpaid.

What is invoice factoring?

Invoice factoring is a type of invoice financing that sells the unpaid invoices to the factoring company. The company then works directly with your clients to retrieve payments. You might choose invoice factoring if your business has a long billing cycle and you need a third party to take part of the billing process off your hands. But having a third party interact with clients could damage business relationships, so tread carefully.

How does invoice factoring work?

Invoice factoring works similar to invoice financing, except that the factoring company is responsible for collecting payments. First, you send your clients the invoices due to you, then take the unpaid invoices to the factoring company. The factoring company buys the invoices from you, offering 70 percent to 90 percent of the total amount.

Next, it receives the client payments directly and takes out fees before paying you the remainder. Fees may also be charged as a percentage of the entire loan, such as 0.5 percent to 4 percent. Some factoring companies may also charge a weekly percentage that goes up over time.

How to choose between invoice financing vs. invoice factoring

Consider these features when comparing invoice financing or invoice factoring companies:

  • Fees and fee structure. Invoice financing and factoring can charge fees in similar ways. But factoring may cost more because the factoring company does more work to collect payments.
  • Client interactions. With invoice financing, you won’t have to worry about the lender interacting with your clients.
  • How you receive funds. You can find invoice financing that pays you as an upfront payment or as an approved line of credit you can draw from at any time.
  • How repayments work. Both invoice financing and invoice factoring advance your business cash up front. With invoice financing, you repay the company after you get paid from clients. But with invoice factoring, the factoring company receives the client payments directly and takes out fees before paying you the rest.

Pros and cons of invoice financing or factoring

Invoice financing or factoring could help your business get quick funding or find financing that you otherwise wouldn’t qualify for. But you’re dependent on your clients making good on their payments. Here are some pros and cons to consider when using these types of financing:


  • Fast cash. Both invoice financing and factoring can provide fast short-term loans to help cover cash shortfalls and emergencies.
  • More accessible than other types of loans. Both invoice financing and factoring have relaxed eligibility requirments. They’re worth considering if you struggle to secure a loan or a business credit card.
  • Lenient requirements to qualify. These types of financing accept businesses with subpar credit because they rely more on the clients’ credit history.


  • Fees can be costly. Both invoice financing and factoring can end up costing you more than traditional loans.
  • Relies on clients paying. Financing companies may charge fees on a weekly basis, meaning that the cost goes up the longer it takes your clients to pay.
  • Not offered by every lender. These are alternative types of financing that not every lender offers. You’ll have to do extra legwork to find a lender.

Bottom line

When your business needs working capital, invoice financing or factoring can help. But if going with invoice factoring, you have to decide whether you’re okay with the factoring company interacting with clients.

You also want to pay attention to fee structures since different invoice financing and factoring companies charge fees differently. Some charge a one-time fee, while others charge fees weekly raising the cost each week the invoices go unpaid. Compare different lenders to make sure you’re getting the best deal.

Frequently asked questions

  • Both invoice financing and factoring use a business’s unpaid invoices to get business funding. But factoring sells the invoices to the factoring company, while invoice financing simply secures a loan guaranteed by the invoices.
  • Invoice financing can charge hefty fees that may cost more than a standard business loan, depending on the lender’s fee structure. For example, some lenders charge a weekly fee that goes up each week the client doesn’t pay.
  • Let’s say your business is a distribution center with a net-60 day billing cycle, giving your retail clients 60 days to pay invoices. You have $200,000 in outstanding payments. You sell those invoices to the factoring company, which advances you 90 percent for a total of $180,000.<br /><br />The factoring company charges a 1 percent fee every week the invoices remain unpaid. Since your clients take four weeks to pay, your total fees are 4 percent of the invoice amount. The factoring company takes out $8,000 in fees ($200,000 x 0.04 = $8,000) and pays you the remaining $12,000. In total, you receive $192,000.