Wiki

What is invoice financing? Definition, benefits, and examples

Aida Kopijn September 21, 2023 Updated on: July 23, 2025

Invoice financing is a financial solution where a business receives an advance on unpaid invoices. Instead of waiting weeks or even months to get paid, a third party—such as a bank or financing company—advances most of the invoice amount upfront.

This form of short-term financing is often used by business owners who need working capital quickly or who are dealing with long payment terms.

On this page, you’ll learn what invoice financing is, how it works, who it’s for, what the pros and cons are, and which alternatives may be worth considering.

Table of contents:

How does invoice financing work?
Who is invoice financing for?
What are the pros and cons of invoice financing?
What’s the difference between invoice financing and factoring?
Alternative: better receivables management with Payt
FAQ about invoice financing

How does invoice financing work?

While the process may vary slightly depending on the provider, invoice financing generally works like this:

You submit an unpaid invoice to a financing provider.
The provider approves the request (often automatically).
You receive up to 90% of the invoice amount within a few business days.
When your customer pays, the remaining balance is transferred to you—minus any fees.

Some providers also offer to handle your accounts receivable process. In such cases, the process more closely resembles factoring.

Who is invoice financing for?

Invoice financing can be especially useful for:

Businesses with long payment terms
Companies that need short-term liquidity
Growing organizations looking to invest without having to wait for customer payments
Startups that may not yet qualify for traditional loans

Important: invoice financing is not a long-term fix for poor receivables management or chronic late payments.

What are the pros and cons of invoice financing?

Pros:

Get paid faster—within days
Flexible: you choose which invoices to finance
Improve cash flow without adding debt to your balance sheet
Often no collateral required

Cons:

Costs: fees or interest may reach 5% or more
Not all invoices or customers are eligible
Less control over customer relationships if outsourced
May lead to overreliance if used long-term

What’s the difference between invoice financing and factoring?

Feature	Invoice financing	Factoring
Per-invoice financing	Yes	Usually entire receivables portfolio
Accounts receivable management	Typically handled in-house	Often outsourced
Cost structure	Variable, per invoice	Often fixed percentage of total volume
Best suited for	Flexible cash flow needs	Long-term, full-service outsourcing

Although invoice financing and factoring are often mentioned together, they are two distinct types of financing.

With invoice financing, the business chooses which specific invoices to fund, and you maintain responsibility for customer communications and collections. The financing company only provides the advance.

Factoring, on the other hand, involves selling (part of) your receivables to a factoring company. They take over the process of following up and collecting payments—directly from your customers.

In short: invoice financing offers more control and flexibility, while factoring is better suited for businesses seeking a hands-off approach and are willing to pay for full outsourcing.

Alternative: better receivables management with Payt

Many business owners turn to invoice financing because payments are late. But with efficient receivables management, you may not need external financing at all. Think of timely reminders, clear communication, and real-time insight into customer payment behavior.

With software like Payt, you can automate your entire receivables process—from invoice to payment—while keeping personal contact with your customers. That way, you stay in control, reduce payment delays, and improve cash flow without relying on external financing solutions.

Curious how Payt can help your business? Download our brochure or schedule a free demo below.

By Aida Kopijn

Aida is an accounts receivable management expert at Payt, known for her precision and organisational passion. She ensures every process is perfectly managed and optimised.