Invoice financing is a loan secured by unpaid invoices (accounts receivable) — the lender advances 70–90% of the invoice face value and holds the AR as collateral, while the borrower retains ownership of the receivable and collects from customers directly. Distinct from invoice factoring, where the receivable is sold outright.
Invoice financing and invoice factoring both monetize unpaid AR, but they are legally and operationally distinct: Invoice Financing (AR Lending): the business borrows against invoices as collateral. The lender advances 70–90% of the eligible AR balance. The business retains ownership of the receivables and continues to collect from customers. When customers pay, the collected funds are used to repay the loan. The customer relationship is undisclosed — customers don't know their invoices are pledged. Invoice Factoring: the business sells the receivable to the factor. The factor owns the invoice and typically collects directly from the customer (notified or 'notification' factoring). The customer is informed their invoice has been assigned. The factor advances 70–90% upfront, then remits the remaining balance (minus fees) after collection. When to use invoice financing: businesses that want to keep the customer relationship undisclosed, prefer a loan structure over an asset sale, and have strong enough credit to qualify for the lending-based product. Typically requires higher business credit quality than factoring. When to use factoring: businesses with thinner credit profiles where the customer's creditworthiness (not the borrower's) drives approval, or where the customer relationship toleration of direct factor contact exists.
Invoice financing is a loan — you borrow against AR, retain ownership, and collect from customers yourself. Invoice factoring is a sale — you sell the AR to the factor, who takes ownership and collects directly from customers. Financing preserves the customer relationship; factoring exposes it. Financing requires stronger borrower credit; factoring is underwritten primarily on the debtor's (customer's) creditworthiness.
Eligible invoices are typically: issued to creditworthy commercial (B2B) customers, for services already rendered (not pre-invoiced), non-contingent (not conditioned on additional performance), net terms of 90 days or less, and not assigned to another lender. Government receivables (federal, state, municipal) are often premium-eligible due to payment reliability.