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Invoice Financing for Small Businesses With Good & Bad Credit

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  • Improves cash flow
  • Easy approval process
  • No collateral required
  • High fees, such as discount fees and service fees
  • Lower funding amounts
  • Lender may communicate with customers to collect payment

Invoice Financing for Small Businesses With Good & Bad Credit

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About Invoice Financing

What is invoice financing?

Invoice financing is a simple way for businesses to borrow money against amounts owed to them by other businesses and customers. Oftentimes, when a business invoices a customer, the payment terms of the invoice can come with terms. Terms could be set at net 30, 60, or even 90 days, giving time for the customer to process the invoice through their accounts payable department and cut a check. 

However, suppose a business wants to cash in on those invoices immediately. In that case, they can work with an invoice financing company that provides cash upfront in exchange for a percentage of the amount owed. The business can then use the money immediately to pay employees, cover operating expenses, and reinvest in the company. When the customer pays what is owed 30, 60, or 90 days later, the invoice financing company is paid back for the original loan.

Also, it is important to note that invoice financing is sometimes also referred to as accounts receivable financing or AR financing. 

How does invoice financing work?

Invoice financing works similarly to a short-term loan. To break this down as simply as possible, let’s use a single invoice. That single invoice serves as collateral, allowing the business to get a cash advance based on the invoice. Once the invoice is paid, the business repays the financial company that advanced the funds. Of course, there’s interest too. Most invoice financing has terms between 30-90 days. Invoice financing is best for B2B sellers that deal with reputable customers. Invoice financing is an inexpensive way to raise capital and improve cash flow. Most invoice factoring transactions come with a single-digit processing fee and a weekly factor fee, usually single-digit. Here’s an example of an invoice financing situation. 

Let’s say a business has $100,000 in invoices they wish to use to apply for invoice financing with a lender. Typically, a lender can charge anywhere from 1% to 5% of the total invoice amount per month. So, if a lender agrees to loan $100,000 to a business, after 30 days, they can receive anywhere from $101,000 to $105,000 for providing the loan. If it's 60 days, the invoice financing company or lender may charge a business between $102,000 and $110,000 for the loan. 

Or another way that invoice financing may work is that a lender may see the $100,000 in invoices and offer a short-term loan of $95,000 for 30 days. After the customer pays, the lender will receive the full $100,000, profiting $5,000 from the short-term loan. 

What are the benefits of invoice financing?

Invoice financing is a great way of getting short-term infusions of cash very quickly. Here are some of the main benefits that businesses can enjoy when they work with an invoice financing company or lender for short-term loans. 

  1. Get quick cash without needing a conventional business loan: There are certain circumstances where a conventional business or equipment loan is needed; however, sometimes, you just need a quick cash infusion to pay some bills or cover operating expenses. A conventional business loan can shit on your balance sheet for months or years and require monthly payments for a long period of time. Invoice financing provides a short-term loan that can be paid in full once the customer pays the invoice or invoices.
  2. Take on bigger projects: Sometimes, a customer may approach you with a massive order that is out of your typical capacity. You may need to make some major purchases of supplies and hire additional temporary staff to fulfill the order. With invoice financing, you can borrow against the value of the sale, get the money you need to fulfill the order, and then pay back the loan only when the customer pays. 
  3. Quick funding: Some conventional loans and SBA loans can take days, weeks, or months to process and receive funding. If you need money now, invoice financing is one of the quickest ways to receive funding. Some lenders and invoice financing companies can approve and fund a short-term loan in as little as 24 hours. 
  4. Avoid supply chain constraints: By using invoice financing to boost your cash flow, you can avoid supply chain constraints or bottlenecks by having enough cash on hand to pay suppliers, purchase inventory, and fill orders.

What are the pros and cons of invoice financing?

Invoice financing is a simple and easy way to get the cash you need now and pay it back once your customers have paid you. For a small percentage, this convenient way of boosting your cash flow is hard to pass up. However, the downsides should be considered as well. 

Here are the main pros and cons of invoice financing.


  • Address cash flow restraints caused by DSO (day sales outstanding)
  • Easy to apply and be approved
  • If paid immediately, can cost less than other types of financing


  • Can cost more than other types of financing if not paid immediately
  • Interest is typically charged every month until payment is received
  • Still on the hook for the loan if a customer defaults on payment of the invoice

What are the types of invoice financing?

There are five main types of invoice financing. There is invoice factoring, invoice discounting, spot factoring, online auctioning, and selective invoice financing. Here is a breakdown of each type of invoice financing in a little more detail.

  1. Invoice factoring: Sell your unpaid invoices to a company or lender who can give you the cash you need now and be compensated when the customer pays. They are responsible for collecting the debt, not you.
  2. Invoice discounting: Borrow against the value of your unpaid invoices, and retain control of all the customer-facing interactions, including payment collection. Once payment has been received from the customer, pay back the loan plus any additional fees the lender or invoice financing company charges. 
  3. Spot factoring: The same thing as invoice factoring, however, can be used to sell single invoices of significant value rather than an entire customer ledger.
  4. Online auctioning: Simply place your unpaid invoices online and watch lenders and invoice factoring companies bid on them. 
  5. Selective invoice financing: Selective invoice financing combines traditional invoice factoring and spot factoring. 

Is invoice financing risky?

Invoice financing, as a practice itself, is not risky. As long as you know your customer is good for the credit you extend to them, then everyone wins. The main risk is if you use invoice financing and your customer doesn’t pay their invoice. You are still responsible for paying the lender or invoice financing company for the loan even though you did not receive payment from the customer. You can later sue that customer for the amount of the invoice and any additional expenses that result in collecting the debt; however, that can be a long process. 

Do Banks do invoice financing?

Some banks may offer invoice financing; however, banks are preferential to conventional business loans and other long-term financing options like equipment loans. Invoice financing is typically done through online lenders and special fintech companies specializing in the practice. 

What is the difference between invoice financing and factoring?

Invoice financing and invoice factoring work pretty much in the same way in which you receive an upfront payment for outstanding invoices that are paid back once the customer pays. However, the main difference between the two is that invoice factoring is when you sell the invoice to a company at a discount. Then that company is responsible for collecting payment.

Invoice factoring can be quite convenient for businesses. However, invoice factoring typically charges a larger percentage, and some customers may find it off-putting. However, if you are a start-up that needs a strong cash flow for constant investment and you do not have the time and resources to devote to collecting payments, invoice factoring can be a solid solution for you. 

While invoice factoring is easy to qualify for, other types of financing may not be as easy. Financing helps businesses grow and is a valuable resource when used responsibly. Whether you’re applying for financing or not, business owners should monitor the financial health of their business regularly. An easy way to do so is at mySMBscore. At mySMBscore a business can view its credit score, as well as things that impact it. This creates the opportunity always to be improving your financial position in the event you need a loan. Our platform allows business owners to compare their business to their peers using the same data banks use to approve loans. MySMBscore strives to empower business owners with data that drives credit decisions, helping lenders make better decisions. 

Need financing? Get your SMBscore today!

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