Invoice Finance vs. AR Automation: Why one is a lifeline & the other a long-term strategy

For finance leaders, there's often a significant time gap between issuing an invoice and receiving payment. When customers demand extended payment terms of 30, 60, or even 90 days—and sometimes pay late beyond those terms—your actual cash flow can lag far behind your revenue figures.

This timing mismatch creates real operational challenges. You need readily available working capital to pay suppliers on time, meet payroll obligations without stress, and invest in growth opportunities. But with substantial assets tied up in accounts receivable, your ability to fund these essential activities can be severely constrained.

Many businesses, desperate for immediate liquidity, turn to invoice financing. This allows them to borrow against the value of their outstanding invoices, providing a quick influx of cash. While this approach does offer temporary relief, it comes with significant costs, complexities, and considerations that make it a far less than ideal, and often unsustainable, long-term strategy.

A truly sustainable approach focuses on addressing the root causes of cash flow delays. This is where accounts receivable automation comes in. By streamlining the entire invoicing, payment, and collections process, you can accelerate your cash conversion cycle – achieving faster access to cash without the dependency and expense of external financing.

Read the blog → What is accounts receivable automation software?

What is invoice finance?

Invoice finance, or invoice financing, is a form of short-term borrowing where your business uses unpaid customer invoices as collateral to secure immediate funding. Instead of waiting for customers to pay, you receive a percentage of the invoice amount upfront from a financing provider.

This financial tool goes by several names, including:

• Accounts receivable financing.
• Receivables financing.
• Invoice discounting (a specific form we'll discuss later).

Invoice finance is particularly common in industries grappling with lengthy payment cycles or significant mismatches between when you must pay your own suppliers and when you receive customer payments. Manufacturing, distribution, transportation, construction, and healthcare companies frequently use this financing method.

Businesses typically consider invoice finance when:

• They face urgent, temporary cash flow shortages.
• Customers demand extended payment terms that strain liquidity.
• They experience rapid growth that outpaces their available working capital.
• They can't qualify for traditional bank loans or lines of credit due to financial history or requirements.
• Seasonal fluctuations create predictable cash flow gaps.

While invoice financing provides immediate liquidity, it's important to understand its various forms, true costs, and limitations before determining if it's the right solution for your business.

Types of invoice financing

The invoice finance market offers several different approaches to turning your accounts receivable into immediate cash. Each option comes with its own structure, benefits, and considerations that finance leaders should carefully evaluate before proceeding. Let's examine the three most common forms of invoice finance that businesses typically consider:

1. Invoice factoring

Invoice factoring, also commonly known as accounts receivable factoring, involves selling your unpaid invoices to a third-party company (the "factor") at a discount. The factor typically advances a portion of the invoice value immediately upon approval, commonly estimated at about 70-90% based on industry standards and your specific arrangement.

What makes factoring distinct is that the factoring company takes ownership of the invoices and handles the collection process directly with your customers. When customers eventually pay, the factor remits the remaining balance to you, minus their fees.

Factoring fees generally range between 1% and 5% of the invoice amount, with higher rates often applied for longer payment terms or perceived higher-risk customers. Since the factor takes responsibility for collections, your customers will be aware of this arrangement, which could potentially impact your relationship with them. Businesses might choose factoring if they lack internal collections resources or expertise.

2. Invoice discounting

Invoice discounting provides similar immediate access to cash but operates more discreetly. You maintain control of your customer relationships and continue to manage collections yourself, while simply using the invoices as collateral for a loan.

The financing company typically advances a percentage of the invoice value—often in the range of 80-95% according to industry practices, though exact rates vary by provider and circumstance. Crucially, your customers are usually unaware of the financing arrangement. This preserves your direct relationship with customers and can be preferable for businesses concerned about how factoring might be perceived.

Fees for invoice discounting tend to be lower than factoring (generally estimated at 0.5-3% of invoice value) because you retain responsibility for collections and the associated risk if customers don't pay.

3. Receivables-based credit lines

A more flexible alternative, receivables-based credit lines allow you to borrow against your entire accounts receivable portfolio rather than individual, specific invoices. This provides more ongoing access to capital without having to set up new financing arrangements for each invoice you issue.

These credit lines typically offer more favorable terms than traditional invoice factoring or discounting, but may require higher invoice volumes and stronger business financials to qualify. They function similarly to traditional bank lines of credit but use your receivables as the primary form of collateral.

Read the blog → Why invoicing automation is crucial for modern accounts receivable

How invoice financing works in practice

The invoice finance process follows a relatively straightforward sequence, designed primarily for speed:

1. You deliver goods or services to your customer and issue an invoice with your standard payment terms.
2. You submit the invoice details to your chosen finance provider.
3. The provider reviews the invoice and your customer's creditworthiness.
4. Upon approval, often within 24-48 hours, the provider advances a percentage of the invoice value (typically 70-95%) to your business bank account. This rapid access to capital is one of the primary drivers for businesses using invoice finance.
5. Depending on the specific arrangement type (factoring vs. discounting), either you or the finance provider collects the full payment from the customer.
6. Once payment is received, you either repay the advance plus fees (in discounting), or the finance provider remits the remaining balance minus their fees (in factoring).

Three parties are involved throughout this process: your business, the finance provider, and your customer. The relationship dynamics and responsibilities vary depending on whether you choose factoring, discounting, or a receivables-based credit line.

Let's illustrate with a real-world example: A manufacturing company delivers $100,000 worth of components to a major customer with 60-day payment terms. Facing immediate cash needs, the manufacturer submits this invoice to their finance provider, who advances 80% ($80,000) within two days. After 60 days, when the customer pays the full amount, the manufacturer receives the remaining $20,000 minus the provider's 3% fee ($3,000), resulting in a total of $97,000 received on the $100,000 invoice.

Invoice finance fees, or borrowing against invoices, can be structured in various ways, making direct comparisons challenging and often obscuring the real expense. Most providers charge some combination of:

• Processing or application fees: One-time charges of 1-5% of the advanced amount.
• Factor fees: Weekly or monthly percentage charges on the outstanding balance.
• Service fees: Regular charges for administration and management.
• Additional charges: Late payment fees, credit check fees, or minimum usage requirements.

When calculated as an annual percentage rate (APR), invoice finance is considerably more expensive than virtually all forms of traditional financing. That seemingly modest weekly factor fee of 1%? That equates to an APR of over 50% when compounded over a year. This makes invoice finance one of the more expensive forms of business funding. Think of these fees not just as costs, but as a significant tax on your revenue and a constant drag on your profitability.

To qualify for invoice finance, providers evaluate:

• Your business's operational history and financial health.
• Crucially, your customers' creditworthiness and payment history, as they are the ultimate source of repayment.
• The quality and value of your invoices (e.g., are they undisputed?).
• Your industry and business model's inherent risk factors.

Beyond these direct costs, consider how invoice finance might affect your customer relationships. Factoring arrangements, where the factor contacts your customers directly, make your financing visible, a situation some businesses prefer to avoid. Even with confidential discounting, there may be procedural changes that alert customers to the arrangement.

Additional risks should be carefully considered before pursuing invoice finance. Businesses may develop an unhealthy dependency on this external financing, which merely masks underlying cash flow inefficiencies rather than forcing you to address them. Financial planning also becomes more complicated when you must account for covenant restrictions, customer disputes, concentrated customer bases (high risk if one major customer defaults), and potential lock-in periods with costly long-term contracts that are difficult to exit.

Rather than treating the symptoms of slow cash flow through financing, accounts receivable automation addresses the underlying causes. AR automation helps businesses get paid faster and reduce their reliance on external funding through streamlined and optimized order-to-cash processes.

Modern AR automation platforms transform traditionally manual, paper-based processes into streamlined digital workflows. They remove bottlenecks, reduce errors, and accelerate payments at every stage of the accounts receivable cycle.

Billtrust's comprehensive AR platform offers targeted solutions to accelerate your cash flow:

• Invoicing: Multi-channel invoice delivery ensures your invoices reach customers faster through their preferred channels—whether electronic, PDF, paper, or AP portals. This reduces transit time and helps invoices enter your customers' approval workflows sooner. Integration with over 260 AP portals and multiple ERPs eliminates manual submission delays and streamlines processing.
• Payments: Flexible payment options allow customers to pay through their preferred methods. Self-service portals give customers 24/7 access to view and pay invoices. Customizable payment policies help you incentivize early payment behavior through automated discounts or surcharges, further accelerating your cash flow.
• Collections: Modernize and scale your credit and collections operations with an AI-powered platform that automates credit, optimizes collections workflows with AI agents and strategies, and enhances cash flow. This technology identifies at-risk invoices, prioritizes outreach, and handles manual tasks.
• Cash Application: Automated matching technology connects incoming payments with outstanding invoices at industry-leading match rates. This reduces manual reconciliation time and provides clearer visibility into your cash position.

The ROI comparison between invoice finance and AR automation reveals striking differences. Invoice finance typically costs a significant percentage of each invoice's value, while AR automation delivers comparable cash flow acceleration through reduced DSO (Days Sales Outstanding) at a fraction of the ongoing cost. After the initial investment in implementation, AR automation continues to deliver compounding value without the recurring percentage fees tied to your revenue volume that characterize invoice finance.

Why AR automation delivers real ROI and better value

AR automation delivers several advantages over invoice finance that make it a smarter long-term choice for most businesses:

• Cost efficiency: While invoice finance requires ongoing fees for every single invoice financed, AR automation involves an initial investment that delivers continual, compounding returns through efficiency gains and faster cash flow. The total cost of ownership for automation is typically far lower over time, especially for businesses with high invoice volumes.
• Customer relationship preservation: Unlike factoring, which inserts a potentially disruptive third party into your customer relationships, AR automation maintains your direct connection with customers while providing them with a better payment experience. This strengthens relationships rather than potentially complicating them.
• Scalable solution: As your business grows, the cost of invoice finance grows proportionally with your revenue. AR automation, however, can handle increasing volumes without equivalent cost increases, making it more cost-effective as you scale.
• Strategic improvement: Invoice finance is a tactical, temporary band-aid that doesn't solve the underlying inefficiencies and bottlenecks in your AR process. Automation addresses the root causes of slow payment, delivering sustained improvement in your cash conversion cycle.
• Data-driven insights: AR automation platforms provide valuable analytics, reporting and visibility that help you make smarter financial decisions. These insights help you identify patterns, predict cash flow, and continuously optimize your processes—powerful benefits that invoice finance simply cannot provide.

AR automation proves particularly superior in scenarios where businesses:

• Have high and growing invoice volumes.
• Face consistent rather than occasional cash flow challenges.
• Want to actively improve the customer payment experience.
• Need better visibility and control over their receivables portfolio.
• Are focused on long-term financial efficiency.

Finance leaders who implement AR automation transform accounts receivable from a reactive cost center into a proactive driver of business value and sustainable financial health.

For over two decades, Billtrust has pioneered AR automation solutions that help businesses control costs, accelerate cash flow, and improve customer satisfaction. Our unified AR platform addresses the entire order-to-cash cycle rather than offering piecemeal solutions, processing over $1 trillion in invoice dollars annually for 2,400+ customers worldwide across more than 40 industries.

The Billtrust platform integrates seamlessly with major ERP systems and financial tools, providing a unified view of your AR operations with unprecedented visibility and control over your cash flow. Our customers consistently report significant improvements in DSO, electronic adoption rates, and operational efficiency—all while reducing their reliance on expensive, external financing solutions.

To learn how Billtrust can transform your accounts receivable operations and eliminate the need for costly invoice financing, connect with our team today.