Invoice factoring is a form of business financing, in which a business sells its accounts receivable (i.e., invoices) to a third party (called a factor) at a discount. Technically, invoice factoring is not a business loan. Invoice factoring provides an advance on payments for outstanding invoices. This way, you can have working capital to reinvest in operations and growth sooner than you could if you waited for your customers to pay you.
How Does Invoice Financing Work?
Invoice financing can be explained in five simple steps:
- You provide the goods/services to your customer and invoice them.
- You send the invoice details to the invoice finance provider.
- A certain percentage of the face value of the invoice is made available to you.
- Either your own credit controller or the invoice finance provider’s sales ledger service carries out the invoice collection procedure.
- When your customer pays the invoice, the rest of the value of the invoice is made available to you — minus a service fee.
Invoice Factoring vs. Invoice Discounting
Invoice finance can be set up in a few different ways, and this is often done by invoice factoring or invoice discounting.
With invoice factoring, the company that needs funding sells outstanding invoices to an invoice finance provider, who pays the company a majority percentage (70 – 85% for example) of what the invoices are worth up front. When the invoice finance provider receives the entire payment for the invoices, it will then send the remaining percentage of the invoice amounts to the business, and the business will pay interest and/or fees for the service. The business’s customers will be aware of this arrangement, however, which runs the risk that it will reflect poorly on the business.
Another form of invoice financing is invoice discounting. Invoice discounting is similar to invoice factoring except that the business — not the invoice finance provider — collects payment from customers, so customers are not aware of the business’s arrangement with the invoice finance provider. Invoice finance providers typically advance businesses up to 95% of the invoice amount with invoice discounting. When customers pay their invoices, the business repays the invoice finance provider, minus a fee.
What Does Headway Capital Offer?
Headway Capital’s True Line of Credit™ offers an alternative to invoice financing that many business owners find to be a better fit for their ongoing financing needs. You can request funds at any time, and your money will generally be in your account as soon as the next business day. As you repay, the amount of credit available to you will replenish, so you can draw again without reapplying whenever the need arises.
Business line of credit
12, 18 or 24 months
No Hidden Fees
See our Rates & Terms for details
Weekly or monthly
Clear payment terms, interest does not compound, no penalty for early payoff
FAQ About Invoice Financing
What does invoice finance mean?
Invoice financing describes a type of business funding in which a business receives an advance of funds from a lender, calculated as a certain percentage of outstanding invoices. Once you collect on your invoice, you pay back the funds plus fees and interest.
What is the difference between invoice finance and factoring?
Is invoice factoring a loan?
Why do companies use factoring?
1We always do a soft inquiry unless your credit file is restricted, in which case we would ask you to contact the credit bureau to lift the restriction. Doing so may result in a hard pull.