The gap between earned revenue and received payment can be risky for many small businesses. Unpaid invoices can derail hiring plans, stall production, or keep you from seizing the next opportunity. Invoice financing offers a way to close that gap without taking on long-term debt or chasing down slow-paying clients. When used strategically, invoice financing can give you access to cash you’ve earned when you need it. For example, in 2023, the industry for invoice financing and asset-based lending supported client turnover valued at almost €2.5 trillion across Europe.

Below, we’ll explore how invoice financing works, what it costs, and how to qualify for it.

What’s in this article?

• What is invoice financing?
  
• How do invoice financing providers charge?
  
• How to qualify for invoice financing
  
• Benefits of invoice financing for small businesses
  
• What are the risks and downsides of invoice financing?
  

What is invoice financing?

Invoice financing is a way for businesses to access the money tied up in unpaid customer invoices before those invoices are paid. Instead of waiting 30, 60, or 90 days for a customer to settle their bill, a business can get a cash advance from a financing provider by using the invoice as collateral. It’s not a loan in the traditional sense: there’s no long-term debt, and you don’t hand over ownership of the invoice. But it gives you immediate access to cash you’ve earned.

Invoice financing is especially common in B2B industries in which:

• Payment terms are long (net 30, net 60, or net 90 is typical)

• Large invoices create cash flow gaps

• Access to traditional credit is limited or too slow

You can use invoice financing to cover payroll, inventory, materials, or other immediate costs, even when revenue is on the books.

How it works

This is the normal procedure for invoice financing:

• After you’ve delivered the goods or completed the work, you invoice your customer. Then, you send that invoice to an invoice financing provider.

• The provider reviews the invoice, confirms it’s valid and undisputed, and verifies that your customer has a history of paying.

• If you’re approved, the provider advances you a percentage of the invoice, usually up to 90% of the total. Then the provider typically transfers the funds in 1–2 days, which gives you a faster way to access cash without waiting for the full payment term.

• You still own the invoice and are responsible for collecting payment. Your customer pays you on your normal terms.

• Once your customer pays the invoice, you use those funds to repay the financing provider. That repayment includes the original advance, plus fees or interest for the time the advance was outstanding.

How invoice financing differs from invoice factoring

Invoice financing is different from invoice factoring, which is when you sell the invoice to a third party (a “factor”), who collects the payment. With invoice factoring, your customer pays the factor. The customer also typically knows you’re using a third-party collection service. With invoice financing, customers often don’t know that financing is involved.

How do invoice financing providers charge?

The fee structure for invoice financing varies, but providers usually charge interest that accrues weekly or monthly.

For instance, a provider might charge:

• 2% of the invoice amount per month

• 0.5% of the invoice amount per week

Some will add:

• Origination or processing fees

• Service fees

Typically, the longer it takes your customer to pay, the more it costs you. Here’s an example:

• Assume you finance a $10,000 invoice with an 85% advance. The provider pays you $8,500 up front, and the fee is 3% on the advance amount per 30 days outstanding.

• If your customer pays in 30 days, you repay the $8,500 advance, plus a fee of $255 and any additional fees.

• If your customer pays in 60 days, the fee doubles to $510 plus any additional fees.

When you convert these short-term fees to an annual percentage rate (APR), invoice financing often has a higher APR than a traditional business loan. However, it’s easier to access and faster to fund. You’re paying for speed, flexibility, and access to revenue you’ve earned.

How to qualify for invoice financing

Compared with traditional loans, invoice financing has a lower barrier to entry. Lenders aren’t as focused on your credit score or collateral; they care more about the strength of your invoices and the reliability of your customers.

But approval still isn’t automatic. Here’s what financing providers tend to look for:

Solid, unpaid B2B invoices

Invoice financing works only if you’re invoicing other businesses or government agencies. You’ll need:

• Invoices for completed work (not estimates or future jobs)

• Payment terms such as net 30 and net 60

• No major disputes or collection issues attached to the invoice

Lenders want to know that the money is earned and that the only thing missing is the payment.

Creditworthy customers

Your customer’s payment behavior matters more than yours because lenders see the invoice as a proxy for risk. If your client regularly pays on time and has good financial standing, you’re more likely to qualify and get better terms.

Expect the lender to:

• Run credit checks on your customers

• Ask for aging reports or payment histories

• Verify the invoice with your client in some cases

If your customers are large, stable businesses with reliable payment habits, that strengthens your application considerably.

Operating history

Providers usually want to see that you have an established business. It doesn’t need to be profitable or have a perfect credit score, but lenders might still examine:

• Time in business (ideally, at least six months)

• Annual revenue or sales volume

• Personal or business credit

Even if your business is new, strong customers and clean invoices can carry more weight than your balance sheet.

No liens on receivables

If you’ve pledged your accounts receivable as collateral for another loan or credit line (e.g., a bank credit line), that can block or delay your application. Many lenders will check for other filings or ask you to confirm your invoices aren’t tied up elsewhere. If they are, you might need to resolve that first or get a subordination agreement covering repayment terms.

Industry fit

Many invoice financing providers work across a broad range of industries, including:

• Manufacturing

• Professional services

• Logistics and transportation

• Staffing

• Wholesale and distribution

But some industries such as healthcare—because of insurance reimbursements—and construction—because of payment complexity—might be more difficult to finance or require a specialized lender. Ensure that the provider you choose understands your space.

The application process is usually straightforward, though that depends on the lender. Expect to provide basic business information, a list of the invoices you want to finance, details about your customers, and bank statements or financials. Many platforms can approve and fund in as little as 24–48 hours. But read the terms closely, especially regarding what happens if a customer doesn’t pay on time.

Benefits of invoice financing for small businesses

Unpaid invoices can stall momentum. You’ve done the work, delivered the goods, and issued the invoice, but you can’t use the cash until the customer pays. Invoice financing lets you access that money early—when you likely need it most.

Here’s why this type of financing can be helpful for small businesses:

Faster access to funds

The biggest benefit is faster access to cash. That money can cover payroll, inventory, rent, or any other expense. You won’t need to wait for your customers to pay their invoices. Instead of watching receivables pile up while your cash reserves run low, you can keep moving.

Invoice financing is also faster than other loan types. You can receive funding within 24–48 hours, which can help you respond to a time-sensitive growth opportunity, a large order that requires up-front purchases of materials, or a short-term cash crunch.

Easier approval process

Invoice financing businesses often care more about your customers’ payment habits than your credit score. If your business is new or your credit history isn’t perfect, you might still qualify as long as you’re invoicing reliable, creditworthy customers. That makes invoice financing one of the more accessible funding options, particularly for:

• Startups and newer businesses

• Businesses with strong receivables but limited collateral

• Owners who want to avoid traditional bank hurdles

Control of customer relationships

Unlike with factoring, invoice financing doesn’t involve a third party chasing your clients for payment. You remain the point of contact, and your customer pays you directly. There’s no outside collection team involved and no shift in how your client experiences the relationship.

That’s an important benefit if:

• You value privacy and want to keep financing behind the scenes

• You manage high-touch or long-term client relationships

• Your brand depends on controlling the full customer experience

Flexibility that scales with your business

Invoice financing scales with sales volume. The more you earn, the more working capital you can access. You’re tapping into your growth. And because you can choose what you finance, this is easier to use strategically—whether you’re covering a short-term gap or supporting the next stage of expansion.

What are the risks and downsides of invoice financing?

Invoice financing can be incredibly useful, but it’s not the right tool for every situation. And it has a cost and other trade-offs that aren’t always obvious. Here are the risks:

Invoice financing is often more expensive than it seems

The convenience of early cash has a price. Though fees might seem small in absolute terms, they can scale quickly. For example, a 3% monthly fee on a $100,000 advance is $3,000 for 1 month. If the customer pays in 60 days, that fee becomes $6,000. When you factor in additional processing or service fees, the total cost rises.

When you calculate these costs as an APR, the rate can become higher than that of a term loan or line of credit. Invoice financing is expensive short-term capital. The speed and flexibility justify it in some cases, but it’s not cheap.

Cost is tied to how quickly your customer pays

This is one of the more unpredictable aspects of invoice financing. For instance, you might expect a 30-day turnaround and plan accordingly. But if your customer takes 45 or 60 days to pay, you have to pay the additional time-based fees.

Some lenders charge weekly; others charge monthly. But in all cases, the longer it takes for the invoice to get paid, the more it costs you. That introduces uncertainty into your cash flow planning and makes it more difficult to forecast the total cost of financing until the invoice is settled.

You retain the risk of nonpayment

Most invoice financing is based on recourse—if your customer doesn’t pay, you’re still liable to repay the advance and the associated fees. This is one of the main distinctions between financing and factoring. With financing, you keep ownership of the invoice. With factoring, the factor assumes the risk but charges more for it.

If a customer disputes an invoice, delays payment indefinitely, or defaults, you’re still responsible for making the financing business whole. Some lenders will offer nonrecourse arrangements for an added cost.

Not all businesses qualify (or benefit)

Invoice financing is designed for businesses that:

• Sell to other businesses or government agencies

• Issue formal invoices with clear terms and deliverables

• Work with customers who pay reliably and on time

If you operate in a B2C model or work with clients who are inconsistent payers, you likely won’t qualify for invoice financing—or will have to accept a much higher risk and cost. Invoice financing is also not a great fit for businesses that issue small invoices in high volumes because the administrative overhead and per-invoice fees can outweigh the value.

There’s potential for customer visibility

Most arrangements for invoice financing are structured to be invisible to your customer. You collect payment as usual, and the financing provider stays in the background. But some lenders require a notice of assignment—a formal note on the invoice that indicates it’s been financed. Others might request that customers submit payments to a lockbox account that’s controlled by the financing business. These practices are more common in factoring, but they occasionally show up in financing models as well.

If your business depends on tightly controlled client communications or if the optics of using financing could raise concerns with a particular customer, it’s worth clarifying how the provider handles payment flows.

Invoice financing is not a long-term solution

Invoice financing can fill a short-term cash gap, but it’s not designed for sustained use. If you rely on it too often, you might find that you’re financing future work just to cover the costs of past projects. If you find yourself consistently using invoice financing to keep the business afloat, it’s probably time to revisit your pricing, payment terms, customer credit policies, or overall capital strategy.

As an alternative, Stripe Capital provides access to fast, flexible financing based on your payment volume and history. If your application is approved, you can often receive the funds the next business day and pay for the financing with a fixed percentage of your daily sales.