What is invoice financing? Definition, benefits and comparison

Invoice financing is a financial solution that allows a business to receive an advance on outstanding invoices. Rather than waiting weeks or even months for payment, a third party – such as a bank or finance provider – pays out most of the invoice amount upfront.

This form of short-term finance is often used by companies that need working capital quickly or are dealing with long payment terms.

On this page, you’ll learn how invoice financing works, who it’s for, what the pros and cons are, and which alternatives to consider.

Table of contents:

1. How does invoice financing work?
2. Who is invoice financing suitable for?
3. What are the pros and cons of invoice financing?
4. What is the difference between invoice financing and factoring?
5. Alternative: take control of your credit management with Payt
6. Frequently asked questions about invoice financing

How does invoice financing work?

Although the process may vary slightly between providers, invoice financing generally follows these steps:

1. You submit one or more unpaid invoices to a finance provider.
2. The provider approves the request (this may be automatic).
3. You receive up to 90% of the invoice amount in your business account within a few working days.
4. When your customer pays, the remaining balance is transferred to you – minus any fees.

Some providers may also take over your credit control processes. In such cases, the solution begins to resemble factoring, also known as invoice finance factoring.

Who is invoice financing suitable for?

Invoice financing is particularly useful for:

• Businesses with long payment terms
• Companies that need immediate access to working capital
• Fast-growing organisations looking to invest while waiting on client payments
• Start-ups that are not yet eligible for traditional bank loans

Please note: invoice financing is not a long-term solution for poor credit control.

What are the pros and cons of invoice financing?

Pros:

• Faster access to your money (within a few days)
• Flexible: you choose which invoices to finance
• Improved cash flow without taking on additional debt
• Often no collateral is required

Cons:

• Costs: fees or interest may reach 5% or more
• Not all invoices or clients may be eligible
• Less control over client relationships if collections are outsourced
• Potential for dependency if used long-term

What is the difference between invoice financing and factoring?

Although invoice financing and factoring are often mentioned together, they are two distinct forms of business finance. If you’re researching the invoice financing meaning, it’s important to understand this difference.

With invoice financing, you choose which invoices to finance and retain full responsibility for managing customer relationships and payment follow-ups. The financier simply provides the cash advance.

Factoring, however, typically involves selling your receivables to a factoring company. That company takes over the collection process – including direct contact with your clients.

In short: invoice financing gives you more flexibility and control, while factoring may suit businesses seeking a hands-off approach and willing to pay for full outsourcing.

Alternative: take control of your credit management with Payt

Many businesses turn to invoice financing as a response to late payments. But with efficient credit management, you may not need to rely on financing at all. Think of timely reminders, clear communication, and insight into customer payment behaviour.

With the accounts receivable management software of Payt, you automate your full receivables process – from invoice to payment – while maintaining personal contact with your customers. This gives you more control, without relying on external finance solutions.

Want to see how Payt can support your business? Download our brochure or book a free demo below.

Frequently asked questions about invoice financing