Invoice financing or invoicing service – which suits your business?

Many companies do the work, send the invoice – and then wait. When payment terms stretch to 30, 60 or even 120 days, money sits in open invoices precisely when it is needed for wages, purchases and growth. The cash flow bottleneck is not a lack of sales; it is that the money reaches the account too late.

There are two very different solutions to this problem, and they are easily confused in everyday language: invoice financing and an invoicing service. They sound the same, but they are meant for different situations and for differently sized players. This guide explains how each speeds up getting paid from invoices, what they cost, and which company and which entrepreneur each one suits.

What does invoice financing mean?

Invoice financing (also known as factoring or selling invoices) is a financing method aimed at companies, in which a company gets the money from its open sales invoices into its account immediately – typically within one business day – instead of waiting out the full payment term for the customer. The financing company usually pays 80–95% of the invoice value right away and the remainder once the customer has paid the invoice on its due date.

Invoice financing is intended for a company that already has a business ID (Y-tunnus) and established B2B sales. The company transfers the invoice to the financing company and receives the money immediately. The cost is typically a few percent of the invoice value, and it suits growing companies in particular, whose biggest challenge is money tied up in work that has been done but not yet paid for. Because the financing is based on accounts receivable rather than collateral, it does not increase the company's debt burden the way a bank loan does.

What does an invoicing service mean?

An invoicing service is something else entirely. Through it, an individual worker – a freelancer, gig worker or part-time entrepreneur – can invoice for their work without a company and business ID of their own. The service acts as the invoicer and the payer of wages: it sends the invoice to the customer, collects the payment, handles withholding tax and side costs, and pays the worker a salary. Such a worker is called a light entrepreneur (kevytyrittäjä).

An invoicing service therefore does not speed up payment for work already done the way invoice financing does; instead, it removes the need to set up a company. From the tax authority's point of view, a light entrepreneur is usually treated like a wage earner for income tax: the invoicing service withholds income tax according to the tax card and remits it automatically to the Tax Administration. The service fee in Finland is typically 3–7% of the invoiced amount, and a light entrepreneur is usually left with around 55–65% of the invoice amount as salary after taxes, the service fee and any YEL insurance contribution.

Invoice financing or invoicing service – a quick comparison

Which entrepreneur suits which?

The choice is not really either–or, because it is about two different starting points. The decisive question is whether you already have a company and a business ID – and whether your problem is that you cannot invoice, or that the money arrives too late.

If you are an individual worker without a business ID and you want to invoice for gigs or part-time work, the right tool is a light entrepreneur invoicing service. When choosing one, look beyond withholding at the pricing and the scope of the service – the service-fee percentage alone does not tell the whole story, because services differ in what the fee includes and what is charged separately.

If, on the other hand, you already have a business ID and established B2B invoicing but long payment terms tie up your cash, invoice financing is the right solution. It does not replace your invoicing system; it speeds up getting paid from invoices: you send the invoice as usual and receive the money into your account without waiting for the due date. Many growth companies move through these as life stages – starting as a light entrepreneur via an invoicing service and moving on to their own company and invoice financing as turnover grows.

Why the money is delayed – payment terms and cash flow

Long payment terms are the root cause of the cash flow bottleneck. The Act on Payment Terms in Commercial Contracts (30/2013) limits the payment term between businesses to a maximum of 30 days as a rule, unless a longer term has been expressly agreed. In practice, many large buyers agree on payment terms of 60–90 days, in which case a small supplier effectively finances its customer's operations while waiting for its own money.

You can prepare for payment delays already at the contract stage, since clear ground rules on the invoice are the first line of defence. When you want to dig into how payment terms and debt collection should be set up and when late-payment interest and reminder and collection fees come into play, it is worth going through the process in advance. Invoice financing, for its part, removes the waiting time entirely, because the money is in your account before the due date – regardless of how long a payment term the customer has been given.

How to choose correctly

The choice is ultimately easy once you start from your own situation rather than the name of the service. First ask what your real problem is: do you lack a way to invoice, or is the money tied up in invoices you have already sent?