What is invoice financing? How it works and examples

You’ve just wrapped up a major project for a client and sent the invoice. Now you’re waiting 30, 60, or even 90 days for payment, but your business still needs cash to cover expenses in the meantime.

Invoice financing is a way to bridge that gap. It lets you unlock up to 90% of the invoice value right away, so you can keep operations running and fund new growth opportunities without waiting for your customer’s payment to clear.

If delayed payments are creating cash flow challenges, invoice financing can help you turn them into opportunities instead.

What is invoice financing?

Invoice financing is a short-term funding solution that lets your business access cash tied up in unpaid invoices. Instead of waiting weeks or months for customers to pay, you can borrow against up to 90% of your invoice value and repay the balance (plus fees) once payment comes in.

It’s a form of asset-based lending: the value of your invoices serves as collateral for a cash advance. You still manage your customer relationships and collections, but you get working capital sooner to cover day-to-day costs like payroll, materials, and utilities.

According to CFO.com, roughly 11% of invoices are paid late, which can disrupt operations and growth plans. Invoice financing helps close those cash flow gaps.

Invoice financing example

Say a manufacturer delivers $50,000 worth of goods and issues an invoice with net 60 terms. To cover immediate expenses, they decide to finance that invoice. Their financing company advances 70% of the invoice ($35,000) at an APR of 12%, compounded monthly, plus a 2% fee on the total invoice value. Within 48 hours, $35,000 is deposited into the manufacturer’s account.

Sixty days later, when the customer pays the invoice, the manufacturer repays the lender $36,704, which includes:

• $35,000 principal
• $1,000 (2% fee)
• $704 in two months of interest (12% APR, compounded monthly)

How invoice financing differs from traditional loans

While both provide access to capital, invoice financing differs from traditional loans in several ways:

• Approval criteria: Based on the quality of your invoices and customer reliability, not your business credit score.
• Collateral: Your invoices serve as the collateral, not physical assets.
• Structure: Funds revolve as new invoices are issued and old ones are paid, offering flexibility.
• Timeline: Funds are typically available within 24–48 hours, compared with weeks for a loan approval.
• Repayment: Automatically repaid once the customer pays their invoice, instead of fixed monthly payments.

Invoice financing vs. invoice factoring

Invoice financing and invoice factoring both help businesses get faster access to cash tied up in accounts receivable, but they work differently.

With invoice financing, your business borrows against unpaid invoices while keeping control of customer communication and collections. Customers usually don’t know financing is being used, making it a confidential agreement between you and your lender.

With invoice factoring, you sell your invoices outright to a third party, called a factor, who then collects payment directly from your customers. This can simplify collections but may require notifying clients of the arrangement.

Key differences include:

• Ownership: In financing, you still own the invoices; in factoring, the factor owns them
• Customer communication: With financing, customers continue paying you; with factoring, they pay the factor
• Costs: Financing typically involves a small fee plus interest; factoring can cost more, with administrative or service fees ranging from 1–6%
• Best fit: Financing suits companies that want to maintain customer relationships. Factoring works better for those that prefer outsourcing credit control and collections.

How does invoice financing work?

Invoice financing lets you borrow against unpaid customer invoices and repay the advance ( plus fees)when the customer pays. The model involves three parties: your business (the seller), your customer (the payer), and the financing provider (the lender).

The invoice financing process

1. Application & approval (1–3 days): You submit basic business info and details about your customers and invoice volume so the lender can assess customer creditworthiness
2. Invoice submission & verification (1–2 days): You send eligible invoices; the lender validates their accuracy and confirms the customer relationship
3. Funding disbursement (1–2 days): On approval, the lender advances typically 70–90% of the invoice value for immediate working capital
4. Customer payment & settlement (30–90 days): When your customer pays, you repay the advance plus fees and interest; any remaining amount (if applicable) is released to you

What types of invoices qualify?

Not every invoice is eligible. Lenders tend to prioritize:

• B2B invoices over B2C, because business payers are easier to validate
• Recent invoices, often within 30–90 days of issue, to limit collection risk
• Reliable customers, based on payment history and financial stability

Invoice financing is most common where payment terms are standardized and invoice values are meaningful—for example, manufacturing, professional services, logistics, and wholesale.

Types of invoice financing

Invoice financing can be structured in a few ways, depending on how much flexibility or security you want. These are the most common types:

Recourse vs. non-recourse financing

Recourse financing lets you access funds from your invoices quickly, but you’re still responsible if a customer doesn’t pay. Because the risk is lower for the lender, approval is faster and fees are typically lower, often around 1–3% of the invoice value.

Non-recourse financing shifts that risk to the lender. If your customer fails to pay, the lender absorbs the loss. This offers more protection for your business but comes with higher fees, typically 3–5% of the invoice amount, and a more rigorous approval process.

Recourse financing works best when your customers have strong payment histories. Non-recourse may be worth the added cost if you want extra security and peace of mind.

Selective vs. whole ledger financing

Selective financing lets you choose specific invoices or customers to finance, giving you flexibility to manage occasional cash flow gaps or test invoice financing before committing. Because it’s optional and more flexible, per-invoice fees tend to be higher.

Whole ledger financing applies to your entire accounts receivable book. It typically requires a minimum invoice volume but offers lower fees per invoice and a higher overall funding limit.

Selective financing favors flexibility; whole ledger financing favors consistency and scale.

Spot factoring

Spot factoring is a one-time form of invoice financing used when you need to fund a single project or large order. It’s ideal for covering short-term cash flow gaps or managing seasonal demand.

Since each transaction is independent, fees are usually higher than ongoing financing options, but it provides freedom when you need quick, one-off access to cash.

Benefits of invoice financing

Invoice financing can help your business manage cash flow gaps and fund growth without taking on long-term debt. Here are the main advantages:

Improved cash flow management

One of the biggest benefits of invoice financing is getting cash back into your business while you wait for customers to pay. According to a CFO.com report, roughly 11% of invoices are paid late, suggesting invoice financing can be a reliable way to stabilize operations.

It helps you:

• Predict cash flow timing: Instead of waiting 30–90 days for payment, you can receive funds in as little as two days
• Take on larger orders: With immediate liquidity, you can accept bigger contracts without worrying about working capital
• Meet payroll and expenses: Ensures you can pay employees and suppliers even during payment delays

Business growth opportunities

Invoice financing is faster and more adaptable than many traditional financing options.

It offers:

• Quick access to funds: Typical approvals take 24–48 hours, far faster than bank loans
• Scalability: The more invoices you issue, the more financing you can access
• Automatic repayment: Your loan is repaid when your customer pays, so you don’t have to manage fixed payment schedules

Flexibility and speed

Invoice financing is faster and more adaptable than many traditional financing options.

It offers:

• Quick access to funds: Typical approvals take 24–48 hours, far faster than bank loans
• Scalability: The more invoices you issue, the more financing you can access
• Automatic repayment: Your loan is repaid when your customer pays, so you don’t have to manage fixed payment schedules

Drawbacks and considerations

While invoice financing can be a valuable tool, it’s not the right fit for every business. Here are some important factors to weigh before committing:

Cost considerations

Invoice financing provides flexibility but comes at a price. Typical lender fees range from 1–5% of the invoice value per month, depending on invoice volume, customer reliability, and payment terms.

It can cost more than a traditional bank loan but less than short-term credit options like business credit cards. The faster your customers pay, the lower your total interest charges.

Before signing, check for extra charges that can add up quickly.

Customer relationships impact

Using invoice financing can affect how customers perceive your business. Some lenders may require you to notify clients that a financing arrangement exists. If so, communicate clearly and professionally to preserve trust.

If you want to minimize visibility, choose a provider offering confidential (non-notification) financing. Starting with selective financing can also help you understand how customers respond before scaling up.

Eligibility limitations

Not every business or invoice qualifies. Lenders generally:

• Prefer B2B over B2C invoices
• Require invoices less than 90 days old
• Look for reliable, creditworthy customers

Some lenders also set minimum annual revenue thresholds, typically between $100,000 and $500,000, which may exclude smaller businesses.

Who should consider invoice financing?

Invoice financing works best for businesses with reliable customers, significant outstanding invoices, and a need for faster access to cash. It’s especially useful for companies managing high operational costs or long payment cycles.

It may be a good fit if your business:

• Needs quick working capital to cover payroll or expenses
• Has strong, predictable customers
• Has limited credit history or struggles to qualify for traditional loans
• Wants to maintain growth momentum while waiting on payments

Startups and fast-growing small businesses sometimes use invoice financing to build credit history and demonstrate repayment reliability to future lenders.

Best-fit business profiles

Certain business characteristics make invoice financing particularly effective:

• B2B companies with long payment terms: Helps bridge cash flow gaps during 30–90 day invoice periods
• Seasonal businesses: Smooths out cash fluctuations during slow months
• Rapid-growth organizations: Keeps operations funded as demand accelerates
• Firms with thin credit files: Provides access to funds without a long borrowing track record

Industries that benefit most

Invoice financing is most common in industries that issue high-value invoices with extended payment cycles, such as:

• Manufacturing and wholesale: Covers raw materials and labor while awaiting customer payments
• Professional services: Keeps consulting, staffing, or marketing firms running between client invoices
• Transportation and logistics: Supports carriers and shippers during 45–90 day payment lags
• Healthcare providers: Bridges cash gaps created by long insurance billing cycles

How to choose an invoice financing provider

Choosing the right invoice financing partner can make a major difference in your funding experience. Look for transparency, reliability, and a provider that aligns with your business model.

Key evaluation criteria

Before signing an agreement, assess each provider based on:

• Advance rates and fee structures: Review what percentage of invoice value they’ll fund and how service or interest fees are calculated
• Funding speed and technology: Ask how quickly funds are delivered and whether their system integrates with your accounting automation software
• Contract terms and flexibility: Understand whether you’re committing to selective or whole ledger financing and check for termination or minimum volume clauses
• Customer service and support: Strong account management helps resolve disputes quickly and protects your customer relationships

Questions to ask potential providers

Before you commit, ask these key questions:

1. What advance rate do you offer, and how is it calculated?
2. What fees or interest charges apply per invoice or per month?
3. Are there additional or hidden fees I should know about?
4. What is the application process, and how long does approval take?
5. How quickly will I receive funds after submitting invoices?
6. Do you offer selective financing, whole ledger financing, or both?
7. Does your system integrate with major accounting platforms?
8. Are there minimum revenue or invoice volume requirements?
9. Will customer contact remain confidential, or will you reach out to clients directly?
10. What support can I expect if a customer delays payment?

Alternatives to invoice financing

Invoice financing is one of several ways to strengthen working capital. Depending on your credit history, funding needs, and business model, these other options may also fit.

Other working capital solutions

• Business lines of credit: Offer flexible access to cash up to a set limit, typically with lower interest rates than credit cards. Useful for managing short-term expenses and payroll.
• Merchant cash advances: Provide a lump-sum payment in exchange for a share of future sales. Best suited for retail or service businesses with consistent daily revenue.
• Asset-based lending (ABL): Secures funding with tangible assets such as inventory or equipment. Offers higher credit limits but requires valuations and audits.
• Trade credit insurance: Doesn’t provide cash directly but protects your receivables if a customer doesn’t pay, improving your credit profile and lender confidence

Improve cash flow and close your books faster with Ramp

When you need cash for immediate day-to-day expenses or for potential growth opportunities, invoice financing could be the answer. It’s fast, flexible, and allows you to borrow up to 90% of your invoice value.

You’re responsible for the associated fees and interest paid back to the qualified lender. But if delayed payments are a problem in your business, invoice financing can be a valuable tool for smoothing cash flow.

Take control of your cash flow today and consider your options. Ramp’s industry-leading corporate card can give you access to credit limits up to 30 times higher than traditional business credit cards.

You’ll also get access to a full suite of finance automation tools, including spend controls, expense categorization, and accounts payable automation features that help businesses close their books up to 8x faster. Ramp integrates with today’s most popular accounting software, giving you complete visibility into all your outstanding receivables.

Try Ramp and see why customers save an average of up to 5% a year across all spending.