Invoice Financing Isn't a One-Size-Fits-All Description. Here's Why

You've done great work for a client, but they're dragging their feet when it comes time to pay. You're out the cash you need... And payroll is coming up. Or you need capital to finance your next project. Or--well, it doesn't really matter. You need that money, and waiting on those tardy customers is hurting your business's cash flow.

This is the big problem that invoice financing, or accounts receivable financing, aims to solve, by using your invoices themselves as collateral for some type of loan. As an asset-based loan, invoice financing is easier to qualify for than term small business loans, because lenders care less about your borrowing history and more about those invoices you've got outstanding or coming up.

The 3 Kinds of Invoice-Based Loans

But there are a few types of invoice-based loans--each with its own pros and cons. Let's compare your invoice options.

1. Invoice Financing

Invoice financing is probably what you think of when you think of invoice-based loans.

Here's the general idea: a lender will advance you about 85% of your invoices upfront, and then you'll receive the other 15%--minus your fees--once that invoice gets collected. You're essentially bridging those potential cash flow gaps for a fee, though the payment model can vary with different lenders.

Some lenders require that you connect your accounting software, but it's not always necessary--although it often does make for a more convenient and streamlined experience, and it's a good practice in general for small businesses.

The advantage of invoice financing is that you get to cover your cash flow shortages. The downside is that you have to collect those invoices yourself--and if you don't wind up getting paid at all, or even if a customer takes a long time, it can be an expensive situation.

Invoice financing can be a pretty diverse category of funding, so let's dive a little deeper into two particular lenders.


Fundbox requires accounting software and works with borrowers looking for smaller loans--up to $35,000 of invoice financing.

Unusually, they give 100% advances and 12 weeks to pay with a set weekly fee instead of rates that depend on the speed of your customer's payments. There's no prepayment penalty, on one hand, but you have to pay Fundbox regardless of whether you get paid, on the other.


Meanwhile, BlueVine services bigger loans--up to $100,000--and doesn't require accounting software. They encourage early payback by charging more the longer an invoice goes unpaid.

BlueVine opens bank accounts and PO boxes in the borrowing business's name to minimize customer confusion, since they don't have to think about paying an invoice collector instead of the business directly--although this does lead to some extra work for you.

2. Invoice Factoring

Invoice financing and factoring are often used interchangeably, but they're very different beasts.

With invoice factoring, your lender buys your invoice debt in exchange for the opportunity to collect on your behalf--for a fee, of course. (That fee usually takes the form of processing fees for the advance, plus a variable rate that depends on the speed of invoice payment.)

So what does this difference actually mean?

First, you get the benefit of cash flow consistency without the hassle of chasing those customers yourself. You get to save time, energy, and stress--just sit back and let that lender collect.

Second, with invoice factoring, you get paid. Your customer submits payment right away? You get paid. They wait thirty years? You get paid. The responsibility of collecting isn't on you anymore.

Of course, on the flip side... You're letting someone else manage a crucial part of your customer relationship, and that might not be the best experience for your loyal followers. Plus, you could be wasting a good deal of money if your customers pay on time--because invoice factoring lenders tend to take a solid cut of the cash.

Invoice factoring generally works best for businesses whose customers take 60-90 days or more to pay, or for those that can't effectively collect invoices on their own--whether because of time constraints, lack of staff, or something else.

3. Invoice-Backed Line of Credit

An invoice-backed line of credit is pretty much what it sounds like: a revolving fund you can draw capital from.

Your credit maximum will get determined by your accounts receivable aging statement, and can change from week to week depending on the invoices you're expecting. It usually sits at around 85% of your invoices.

When your customers pay off their invoices, that cash goes directly to the lender--who uses it to pay off your debt against the line of credit. And if you don't have any funds drawn, your money gets redirected to the business right away.

This product combines the best parts of invoice financing and lines of credit, with the exception that your credit maximum is directly related to your invoices--so you can't necessarily use it to finance larger, long-term projects.


If you've got slow paying customers, or just need a good cash flow boost, you can now choose the product that fits best with your business. They all have their advantages and problems, but if you've got customer payment-related cash flow issues, they can make a big difference to your business's growth.