Net-30, net-60, or net-90 payment terms are standard in the business-to-business (B2B) world—but of course, that means you’re often left waiting up to 90 days to get paid for work you finished long ago.
This is an all-too-familiar situation, and it leads to some troubling cash flow problems for many B2B businesses. Our own research from January 2026 found that the share of small businesses that failed to process payroll due to insufficient funds rose 54% over six years, and nearly one in four still see irregular accounts receivable and payable timing after four years in business.
So how should a B2B owner deal with the common cash flow problem of slow-paying, outstanding invoices? Two options, invoice financing and invoice factoring, can help turn unpaid invoices into working capital now.
Invoice financing vs. invoice factoring: what's the difference?
People often use these terms interchangeably, but they work differently.
Invoice factoring means you sell your unpaid invoices to a factoring company. The factor pays you most of the value of your eligible invoices upfront, takes over collecting payment from your customer, and pays you the rest (minus its fees) once your customer pays. Because the factor collects, your customer usually knows you're working with one.
Factors care less about your credit and more about whether your customers are creditworthy, so approval often depends on your customers’ creditworthiness rather than your own. That can make factoring easier to get if your own credit score is limited.
Invoice financing (also called accounts receivable financing or invoice discounting) means you borrow against your unpaid invoices, using them as collateral. You keep ownership of the invoices, and you keep collecting payment from your customers yourself. Your customers typically never know.
In either situation, three parties are involved:
Your business, which needs cash now.
Your customer (the account debtor), who owes payment on the invoice.
The financing company, which supplies the cash.
How do invoice financing and factoring work?
Here's the typical flow, using factoring as the example:
You deliver your product or service and send your customer an invoice.
You submit the invoice to the factor, which advances you a percentage of its value. Cash advances commonly run 80–95%, though they can be lower in some industries.
Your customer pays the invoice, usually to the factor.
The factor sends you the remaining balance (the "reserve"), minus its fees.
With invoice financing, steps 1 and 2 look similar, but you collect from your customer and repay the lender, plus interest and fees.
What does it cost to go with invoice financing or factoring?
Costs vary by provider, and they can add up fast.
Factoring fees are typically quoted per 30 days, often somewhere between 0.5% and 3.5%, and sometimes higher. The longer your customer takes to pay, the more you pay.
Annualized, those fees can work out to a much higher rate than a traditional loan, with an effective APR of 15% to 60%.
Invoice financing is generally cheaper than factoring, but still comes with interest rates, plus possible origination, monitoring, or unused-line fees.
Service fee / processing fees: Beyond the main fee, look for a service fee for account management and processing fees for each invoice or transfer.
Before you sign, ask every provider for the all-in effective APR on an example invoice that looks like yours.
What should you watch out for?
Liens. Factoring agreements often include a blanket lien (a UCC-1 filing) on your business assets, which can get in the way of other financing, including SBA loans, until it's released.
Recourse. In a recourse deal, you're on the hook if your customer doesn't pay. Non-recourse deals shift more of that risk to the factor, usually at a higher price.
Customer relationships. With factoring, a third party contacts your customers about payment. Make sure you're comfortable with how they do it.
Who can use invoice financing or factoring?
Invoice financing and factoring have long been common in industries like construction, staffing, transportation, medical services, wholesale, and manufacturing. Today, you'll also find them used by marketing agencies, IT firms, consultancies, and other professional services businesses.
It's the best fit for B2B businesses with lumpy cash flow, seasonal swings, or long payment cycles. If you're a B2C business, or your customers pay on delivery, it won't help you much since there are no invoices to finance.
Is invoice financing or factoring right for you?
Invoice financing and factoring can be a faster, more flexible alternative to a traditional bank loan, especially when your customers are reliable but slow. Compared to a traditional business loan or term loan, you’re not taking on fixed monthly payments. Compared to a business line of credit, invoice financing ties what you can borrow to your invoices instead of your credit history.
Just bear in mind that neither of these options offers the cheapest way to borrow. Make sure you’re comfortable with the numbers before you move forward.
FAQs
What’s the difference between invoice financing and invoice factoring?
Invoice factoring means selling your unpaid invoices to a factor, which collects payment from your customer. Invoice financing means borrowing against your unpaid invoices as collateral, while you keep ownership and collect payment yourself. With factoring, your customer usually knows about the arrangement. With financing, they typically don’t.
What are the risks of invoice factoring?
The main risks are liens, recourse, and customer contact. Factoring agreements often include a blanket lien that can block other financing, including SBA loans. In a recourse deal, you’re on the hook if your customer doesn’t pay. And with factoring, a third party contacts your customers about payment.
Does invoice factoring hurt your credit score?
Invoice factoring usually doesn’t hurt your credit score, because it’s a sale of receivables rather than a loan and isn’t typically reported to credit bureaus. Factors mainly evaluate your customers’ creditworthiness. The main risk is recourse factoring: if customers don’t pay and you can’t cover the buybacks, your credit can suffer indirectly.
How fast can you get paid with invoice factoring?
Once your account is set up, many factors fund approved invoices within 24 hours, often the same day. The initial setup takes longer, typically 3 to 10 business days after you sign the agreement. Missing paperwork and slow invoice verification can cause delays, so ask providers for the full timeline to first funding.
Who can use invoice financing or factoring?
B2B businesses that wait 30 to 90 days to get paid can use invoice financing or factoring, especially those with seasonal or lumpy cash flow. It’s common in construction, staffing, transportation, and professional services. B2C businesses and those paid on delivery gain little, since they have no invoices to finance.
