Quick overview

Short-term invoice financing (also called invoice factoring or receivables financing) converts unpaid invoices into cash—often within 24–48 hours—so freelancers and agencies can pay vendors, contractors, or staff without waiting for client payment cycles. (See our full Invoice Financing guide for deeper context.)

How the process typically works

  1. Application: Submit your invoices and basic business info to a financing company.
  2. Underwriting: The lender reviews the invoices and often checks the credit of your clients (because they’ll be the ones repaying).
  3. Advance: The lender pays an advance — commonly 70–90% of invoice value — within a day or two.
  4. Reserve & fees: The lender holds a reserve (the unpaid portion) and deducts fees or interest according to the contract.
  5. Collection: The lender collects payment directly from your client. After collection, the lender returns the reserve minus fees.

Example: You invoice a client $10,000. With an 80% advance, you receive $8,000 immediately. The lender holds $2,000 as a reserve. If the fee is 2% of the invoice ($200), after the client pays, the lender returns $1,800 ($2,000 reserve − $200 fee).

Cost structures and what to watch for

  • Fee types: flat per-invoice fee, a percentage of the invoice (discount rate), or a time-based factor fee (e.g., 1–4% per 30 days). Compare apples to apples when evaluating offers.
  • Advance rate: Typically 70–90%, depending on industry and client creditworthiness.
  • Reserve: The portion the lender holds back until client payment. Higher reserves protect lenders on riskier clients.
  • Recourse vs non-recourse: With recourse financing, you may owe the lender if the client doesn’t pay; non-recourse shifts that risk to the lender but usually costs more.

For more on advance and reserve mechanics, see Advance Rate and Reserve Structures in Invoice Financing.

Who is eligible and when to use it

  • Good fit: Freelancers and agencies with recurring invoices, established clients, and predictable receivables.
  • Less fit: New businesses with unproven clients or irregular invoices—these may face lower advance rates or higher fees.

Use cases: bridge payroll between projects, buy contractor time to complete a large job, or take on faster growth when client payment terms are long.

Pros and cons (short list)

Pros:

  • Fast access to cash (often 24–48 hours).
  • Approval focuses more on your clients’ credit than your business credit.
  • Flexible: finance by invoice as needed.

Cons:

  • Fees can add up; short-term convenience costs money.
  • Some lenders contact your clients directly, which may affect client relationships—compare confidentiality and notification policies.
  • Risk of recourse obligations if clients don’t pay.

Negotiation and selection tips

  • Compare effective cost, not just headline rates: ask for a sample total cost on a typical invoice and its time-to-collect.
  • Confirm whether the lender notifies clients and how collections are handled.
  • Negotiate advance rate, reserve size, and fee caps for long-term contracts.
  • Ask about minimums, contract length, early termination penalties, and holdback release timing.

Also compare invoice financing with related options such as traditional factoring or short-term lines of credit; our article Invoice Financing vs Factoring: Which Is Better for Seasonal Businesses? can help you weigh tradeoffs.

Real-world example

A three-person creative agency won a $50,000 retainer project with 60-day net terms. They sold $25,000 in invoices to a factoring firm at an 80% advance and a 1.5% fee per 30 days. The agency used the immediate funds to hire a contractor and complete deliverables; when the client paid, the agency received the reserve minus fees. The short-term cost was offset by additional revenue the agency won because it could meet delivery timelines.

Practical checklist before you sign

  • Ask for a written example calculation on a representative invoice.
  • Confirm recourse status and collection practices.
  • Compare at least three providers and request references from similar-sized businesses.
  • Check for hidden fees: account admin, onboarding, ACH returns, or minimum monthly charges.

Sources and further reading

  • U.S. Small Business Administration: guidance on financing options (sba.gov)
  • Consumer Financial Protection Bureau: shopping for small business financing (consumerfinance.gov)

Professional note and disclaimer

In my experience helping freelancers and agencies evaluate financing, invoice financing is a strategic liquidity tool when used for planned, short-term needs—not as a long-term substitute for healthy working capital management. This article is educational and not personalized financial advice; consult a licensed financial or tax professional to assess your specific situation.