TL;DR

Invoice financing lets you turn unpaid invoices into immediate cash without waiting for clients to pay. A lender advances 70–90% of the invoice value, then you repay when the client pays. It's a tool for bridging cash flow gaps — but the fees add up.

Key Points

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Two main types: invoice factoring (you sell the invoice to a factor, who collects directly from the client) and invoice discounting (you borrow against the invoice and collect from the client yourself)

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Advances are typically 70–90% of the invoice value; the remaining balance (minus fees) is paid when the client pays

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Fees range widely but commonly run 1–5% of the invoice value per month, making annualized costs significant for ongoing use

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Invoice financing is best used for temporary cash flow gaps, not as a permanent substitute for healthy billing practices

Invoice Factoring vs. Invoice Discounting

The two main flavors of invoice financing differ in who collects from the client¹. In invoice factoring, you sell your receivable to a third party (the factor), who pays you 70–90% upfront and then collects the full invoice amount directly from your client. The factor earns the difference between the full invoice and what they paid you. In invoice discounting (also called a receivables line of credit), you borrow against your invoices but retain control of the client relationship and collect payment yourself, repaying the advance plus fees when the client pays. Factoring is more hands-off and accessible; discounting is more private and doesn't involve a third party contacting your clients.

When Invoice Financing Makes Sense

Invoice financing addresses a specific problem: you have completed work invoiced to reliable clients, but the payment lag (common with Net 60 or Net 90 terms) is creating a Cash Flow problem. It's particularly relevant for project-based businesses where large invoices are outstanding, or for businesses that rely on a small number of large clients with long payment terms. Before using invoice financing, however, consider the cheaper alternatives: renegotiating payment terms with clients, requiring upfront deposits, or shortening your standard terms from Net 60 to Net 30. Invoice financing solves the symptom; changing payment terms solves the cause.

The Cost of Invoice Financing

Invoice financing fees vary by provider, invoice size, client creditworthiness, and financing duration. Typical fees range from 1% to 5% of the invoice value per 30 days. For a $10,000 invoice financed for 60 days at 3% per 30 days, the total fee is $600 — you receive approximately $9,000 upfront and $400 when the client pays. On an annualized basis, this is equivalent to a 36% interest rate. This is expensive capital, and ongoing reliance on invoice financing can meaningfully erode margins. Use it strategically for one-time cash gaps or during rapid growth phases when revenue is outpacing collections timing — not as a permanent substitute for tighter payment terms.

References

FreshBooks — Invoice Factoring ↗

freshbooks.com

FreshBooks — Cash Flow Analysis ↗

freshbooks.com

Last updated: June 9, 2026

Related Terms

Invoice Factoring

A financing arrangement in which a business sells its unpaid invoices to a third-party company (a factor) at a discount in exchange for immediate cash.

Cash Flow

The net movement of money into and out of a business over a specific period, reflecting the actual cash received from clients and paid to vendors, suppliers, and operating expenses.

Working Capital

The difference between a business's current assets (cash, receivables, inventory) and current liabilities (accounts payable, short-term debt) — a measure of short-term financial health and operational liquidity.

Accounts Receivable

Money owed to a business by its customers for goods or services that have been delivered but not yet paid for.

Net 60

A payment term indicating that the full invoice amount is due within 60 calendar days from the invoice date.

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