Invoice financing is a modern form of financing that helps companies convert accounts receivable into cash immediately. Instead of waiting 30–90 days for payments from your customers, you can access the funds within as little as 24 hours.
How Does Invoice Financing Work?
The invoice financing process is simple and fast. When you send an invoice to your customer, you can simultaneously sell it to a finance company. You typically receive 80–95% of the invoice value immediately, and the remainder when the invoice is paid.
Steps of invoice financing:
- You send an invoice to your customer as usual
- You transfer the invoice to the finance company digitally
- You receive 80–95% of the invoice value within 24 hours
- Your customer pays the invoice on the due date
- You receive the remaining balance minus the service fee
Who Is Invoice Financing Suitable For?
Invoice financing is especially suited for B2B companies that have long payment terms with their customers. Typical users include construction companies, transport firms, consulting businesses, and industrial subcontractors.
Invoice financing is especially suitable for:
- Growth companies that need working capital for expansion
- Companies whose customers pay on 30–90 day terms
- Project-based businesses (construction, consulting)
- Subcontractors waiting for payments from large clients
- Companies that lack traditional collateral for bank loans
Did you know? Finnish SMEs have an average payment term of 45 days, which ties up significant working capital. According to Finnvera, 42% of SMEs find cash flow challenging.
Who Is Invoice Financing NOT Suitable For?
Invoice financing is not the right solution for everyone. It is important to understand when other alternatives should be considered.
Invoice financing is probably not suitable if:
- You invoice consumers (B2C) – finance companies focus on business invoices
- Your customers have payment terms under 14 days – the cost outweighs the benefit
- Your business depends on a single customer – the concentration risk is too high
- You have disputed or uncertain receivables – they are not eligible for financing
- You need financing for investments – a bank loan is more affordable in that case
Benefits of Invoice Financing
Key benefits of invoice financing:
- Improved cash flow and payment capacity
- No additional debt on the balance sheet
- Fast and flexible financing
- Ability to offer longer payment terms to customers
- Focus on core business, not collections
Risks and Drawbacks of Invoice Financing
As with all forms of financing, invoice financing also has risks and drawbacks to consider. An honest assessment helps you make the right decision.
Potential drawbacks:
- Cost eats into margins – if your margins are thin, the 1–3% financing cost can be significant
- Dependency on the finance provider – long-term use can create a dependency
- Does not solve the underlying problem – if cash flow issues stem from unprofitability, invoice financing only postpones the problem
- Customer selection – not all invoices qualify, e.g. invoices from new or poorly rated customers
- Credit loss liability – in most models, the liability remains with your company if the customer does not pay
What Does Invoice Financing Cost?
Invoice financing costs typically consist of a service fee (0.5–2% of the invoice value) and a possible interest charge. The total cost is usually 1–3% of the invoice value, which is competitive compared to other financing options.
Concrete Pricing Examples
Below are three examples illustrating the actual costs of invoice financing in different scenarios:
Example 1: Small invoice, short payment term EUR 10,000 invoice, 30-day payment term Service fee: 1.5% = EUR 150 Interest cost (5% p.a. for 30 days): ~EUR 41 Total cost: EUR 191 (1.9% of the invoice value)
Example 2: Medium invoice, longer payment term EUR 50,000 invoice, 60-day payment term Service fee: 1.2% = EUR 600 Interest cost (5% p.a. for 60 days): ~EUR 411 Total cost: EUR 1,011 (2.0% of the invoice value)
Example 3: Regular use, monthly level EUR 100,000/month in invoicing, average 45-day payment term Service fee: 1.0% = EUR 1,000/month Interest cost (5% p.a.): ~EUR 617/month Monthly cost: ~EUR 1,617 (1.6% of revenue)
"Invoice financing has saved the cash flow of many growth companies. It enables growth without having to turn down orders due to a lack of working capital."
Invoice Financing vs. Other Alternatives
Invoice financing is just one of many working capital financing options. Compare the alternatives before making a decision.
Comparison of alternatives:
- Bank loan: Low interest rate, but requires collateral and a lengthy application process
- Credit facility: Flexible, but difficult for small businesses to obtain
- Factoring: Similar principle, but typically involves the entire invoice portfolio and collections
- Business loan: Fixed amount, suitable for investments but not for cash flow management
Confidential vs. Disclosed Invoice Financing
Invoice financing can be implemented in two ways: confidentially or openly. The choice affects the customer relationship.
Differences:
- Confidential invoice financing: The customer is unaware of the financing; payment goes to your account as normal
- Disclosed invoice financing: The invoice contains the finance company's details; the customer pays the financier directly
- Confidential is suitable when you want to keep the customer relationship unchanged
- Disclosed may be slightly cheaper, as the finance company's risk is lower
How to Get Started with Invoice Financing
Getting started with invoice financing is easy. Contact a finance company, provide the necessary business information, and you can often begin within a few days. Digital services allow you to transfer invoices directly from your accounting software.
To get started, you will need:
- Your business ID and basic company information
- The most recent financial statements or interim reports
- Information about your main customers (name, business ID)
- Examples of invoices to be financed
