A new company's first year is the most challenging from a cash flow perspective. According to Finnvera, only 15% of new businesses obtain a traditional bank loan during their first year. Clients exist, but payments arrive with a delay – and fixed expenses run every month. Invoice financing offers a solution to this problem.
Why Traditional Financing Does Not Work for New Businesses
A traditional bank loan typically requires at least two years of operating history, financial statements, and often collateral – property, machinery, or other assets. A new business rarely has these. Banks also assess risk based on the company's historical data, which simply does not exist.
Public financing (Finnvera, Business Finland, ELY centres) is important for new businesses, but it does not cover everything. According to Business Finland, public funding typically covers 50–70% of development costs, and the self-financing share must come from elsewhere. Furthermore, the public funding application process is slow – decisions can take months.
Around 30,000 new businesses start in Finland each year. Most of these are small companies whose biggest financing challenge is working capital and cash flow – not investment.
How Does Invoice Financing Work for a New Business?
The basic principle of invoice financing is the same as for established companies: you sell the invoice to a finance company and receive 80–95% of the invoice value immediately into your account. The difference is that the financing decision is primarily based on your clients' creditworthiness – not your company's history.
This is a decisive advantage for a new business. If your clients are reliable, established companies, their credit rating is sufficient as the basis for the financing decision. Your company's age, size, or balance sheet structure is secondary.
Invoice financing process for a startup:
- Apply for invoice financing – the process takes 1–5 business days
- The financier assesses your client's credit rating
- You receive a financing decision and limit
- Perform the work and invoice your client as normal
- Transfer the invoice to the finance company – receive 80–95% within 24 hours
- The client pays on the due date; you receive the remainder minus the service fee
Invoice Financing
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Requirements for New Businesses
Although invoice financing is more flexible than a bank loan, certain requirements apply. As an entrepreneur, I have seen which factors matter most in the financing decision for a startup.
General requirements:
- A business ID and active trade register entry
- B2B invoicing – consumer invoices are not accepted
- Clients with good or reasonable credit ratings
- A clear invoicing process and documentation
- No active payment default entries for the entrepreneur
- Preferably at least one completed and paid assignment
A personal guarantee may be required, especially at the startup stage. This is normal practice and generally applies only to the initial phase. Once the collaboration has become established and trust has been built, the guarantee may be lightened.
When Is Invoice Financing the Best Option for a Startup?
Invoice financing is best suited for a new business that already has clients and invoicing but whose cash flow is insufficient to run operations. Typical situations include the first large projects requiring hiring before the client pays, or rapid growth where new orders arrive faster than payments from previous ones.
Invoice financing is particularly useful when:
- You have 30–90 day payment terms with large companies
- Growth requires hiring or material procurement before payment
- A bank loan is not possible due to lack of history
- You need flexible financing that scales with revenue
- You want to retain ownership – invoice financing does not dilute shares
Invoice Financing Costs for Startups
For a new business, invoice financing is typically slightly more expensive than for an established company. This is due to higher risk and lower volumes. The typical cost is 1.5–3% of the invoice value.
Example of startup costs: EUR 20,000 invoice, 45-day payment term. Service fee 2% = EUR 400. Interest cost (6% p.a., 45 days) = EUR 148. Total cost: EUR 548 (2.7%). This is considerably cheaper than a venture capital investor's dilution or a short-term quick loan.
It is important to compare the cost against the opportunity cost. If without financing you cannot take on a new project or must turn down growth, the lost revenue is likely many times the cost of financing.
Tips for Getting Approved
Financiers evaluate a new business differently from an established one. As an entrepreneur, I have learned which factors weigh in the decision and how to prepare the application.
Practical tips:
- Prepare a clear description of your business and clients
- Compile a list of current and future clients with their credit ratings
- Show existing contracts or orders
- Keep your bookkeeping up to date and present it neatly
- Be open about your company's situation – honesty builds trust
- Start with smaller invoices and gradually increase volume
- Consider offering a personal guarantee at the initial stage
A Startup's Financing Journey – Invoice Financing as Part of the Whole
Invoice financing is not the only financing form a new business needs – but it is an excellent part of the whole. A typical startup financing journey may look like this: at the start, equity and a start-up grant; after the first clients, invoice financing; during the growth phase, a Finnvera loan or Business Finland funding; and at the established stage, bank financing.
The particular advantage of invoice financing is that it scales with revenue. The more you invoice, the more you can finance. This is an ideal mechanism for a growth company – financing grows automatically with need.
"When I founded my own company, invoice financing was the first external financing form I used. It enabled hiring the first employees before clients had time to pay. Without it, growth would have been delayed by months."
Summary
Invoice financing is a new business's best friend for cash flow management. It does not require a long operating history, financial statements, or collateral – the financing decision is based on the clients' creditworthiness. The cost is reasonable (1.5–3%), and financing scales as revenue grows. A startup should prepare their application carefully, start with smaller invoices, and build the collaboration with the financier gradually.
📌 Summary
Invoice financing is excellent for new businesses: the financing decision is based on the clients' credit rating, not the company's age. Requirements include B2B invoices, reliable clients, and a clear invoicing process. The cost is 1.5–3% and financing scales with growth. It is often the only available financing form for a new company.
Invoice Financing Cost Calculation
What does invoice financing really cost?
