How to Use Invoice Financing (And When You Shouldn’t)

Cash flow is essential for any business's survival. A study by U.S. Bank reveals that 82% of business failures stem from cash flow issues. Even companies that are profitable can face challenges if they don't have enough working capital to pay suppliers, employees, or invest in growth. However, managing cash flow goes beyond just obtaining financing; it involves creating solid financial foundations that reduce risk and reliance on credit.

Before exploring options like invoice financing, businesses need to implement scalable Accounts Receivable (AR) processes. That’s where Upflow’s Financial Relationship Management (FRM) comes in—equipping companies with the tools to streamline payment cycles, reduce delays, and improve predictability across the cash conversion journey.

And once that foundation is in place, that’s when invoice financing truly comes into its own—unlocking liquidity at the right time, without sacrificing control. A mature collections process ensures businesses can leverage financing not out of necessity, but as a strategic growth enabler. Keep reading to find out:

• What is Invoice Financing?

• The Real Cost of Late Payments

• How Does Invoice Financing Work?

• Invoice Financing vs. Invoice Factoring

• Key Benefits of Invoice Financing

• Who Should Consider Invoice Financing?

• Evaluating Invoice Financing vs. AR Optimization

Not sure where your AR process stands? Upflow’s free discover plan gives you instant insights into your collections process

What is Invoice Financing?

Invoice financing is a financial solution that allows businesses to borrow against their outstanding invoices, providing them with immediate working capital without having to wait for customer payments. This option is particularly beneficial for industries that experience lengthy payment cycles, such as manufacturing, logistics, and B2B services.

According to the SME Finance Forum, more than 40% of small and medium enterprises (SMEs) face challenges in obtaining credit, making invoice financing a compelling alternative to traditional bank loans.

The Real Cost of Late Payments

A recent study from the European Payment Report revealed that 62% of businesses face cash flow challenges because of late payments. As the research conducted by Atradius shows, of all the invoices issued in the US, 55% are paid late, less than half of all US invoices are paid on time (36%), while 9% of invoices end up written off.

🔴 Consequence: Late payments can create operational bottlenecks, compelling businesses to resort to costly short-term financing.

Calculate the cost of your late payments with our free calculator: https://upflow.io/costestimator

🟢 Solution: Adopting a well-structured accounts receivable strategy can help minimize payment delays and enhance liquidity.

How Does Invoice Financing Work?

The invoice financing process is quite simple:

1. A business sends an invoice to its customer with a specified due date (e.g., 30-90 days).

2. The business then applies for invoice financing through a lender or financial institution.

3. The lender provides an advance of a percentage (usually between 70-90%) of the invoice amount right away.

4. The customer pays the invoice according to the agreed terms.

5. Before releasing the remaining balance to the business, the lender deducts any applicable fees and interest.

This method helps businesses maintain cash flow while they wait for payments, effectively bridging any financial gaps.

Invoice Financing vs. Invoice Factoring

While invoice financing and invoice factoring are frequently mistaken for one another, they are actually quite different:

Invoice financing: In this arrangement, the business keeps control over its invoices and customer relationships. The lender provides funds based on the outstanding invoices but does not take over the collection process.

Invoice factoring: Here, the business sells its invoices to a third-party factoring company, which then takes on the responsibility of collecting payments. This option often comes with higher fees and potential risks to customer relationships.

Benefits & Who Should Use It?

Key Benefits of Invoice Financing:

• Enhanced Cash Flow: Turn unpaid invoices into available working capital.

• Quick Access to Funds: Unlike traditional loans, invoice financing typically offers faster approval and funding.

• Maintain Customer Relationships: Unlike factoring, businesses keep control over their collection efforts.

Who Should Consider Invoice Financing?

• Businesses with lengthy payment cycles (such as agencies, wholesalers, and manufacturers).

• Companies facing seasonal revenue changes.

• Rapidly growing businesses that need to quickly reinvest cash.

According to Allied Market Research, the global invoice factoring market was valued at $1.95 bn in 2021 and is projected to reach $4.6 bn by 2031, growing at a CAGR of 9.4%. This underscores the increasing reliance on invoice financing as a financial solution. While invoice financing can be a helpful tool, it is crucial to first optimize your accounts receivable processes. Upflow’s FRM solution enables businesses to automate collections, track payments in real-time, and reduce reliance on external financing. Companies that actively oversee their accounts receivable can lower financing costs and improve financial predictability.

At Upflow, we know, based on the behavior of our 500+ customers, that effective receivables management significantly lowers financing costs and helps businesses make the most of their working capital.

Our Financial Relationship Management platform enables businesses by:

• Automating invoice follow-ups to minimize late payments.

• Providing real-time payment tracking to improve forecasting.

• Enhancing collection efficiency, which reduces the need for costly financing.

"Upflow helped us structure and professionalize our AR process, which had a direct impact on reducing overdue invoices." —Julien, Finance Director at Spendesk

Actionable Next Steps: Evaluating Invoice Financing vs. AR Optimization

Determining whether invoice financing is the right strategy for your business requires a clear understanding of your existing financial processes and challenges. Here's a practical checklist to guide you through this important decision-making process:

Step-by-Step Checklist:

1. Evaluate Important AR Metrics

   Calculate important AR metrics, Average DSO, Aging Balance to understand how quickly customers pay their invoices. High DSO indicates inefficiencies in collections, making it critical to streamline your receivables.

   Leverage Upflow’s Discover Plan (evaluate your AR health) for an accurate, actionable analysis of your current financial health for free.

2. Benchmark Your Current Approach

   Assess your existing AR processes to clearly understand how much cash you could unlock today.

3. Automate Follow-Up on Overdue Invoices with Upflow FRM

   Implement Upflow’s Financial Relationship Management Solution to automate invoice reminders, track customer payment behaviors, improve customer experience by providing them a dedicated customer portal with multiple payment methods to make it easy for them to pay you, and establish consistent collection processes. Automation reduces manual tasks and enhances cash flow predictability.

4. Monitor AR Improvements Over 60-90 Days

   Track improvements in payment cycles, reduction in overdue invoices, and overall DSO after implementing automated collections. Monitoring these metrics demonstrates whether your AR optimization is effective.

5. Consider Invoice Financing If Necessary

   If, after optimizing your AR processes, working capital gaps continue to persist, strategically evaluate invoice financing to bridge cash flow gaps. This should be a complementary measure, not your primary solution.

By systematically optimizing your accounts receivable first, you'll ensure invoice financing becomes a strategic financial tool rather than a costly necessity.

FAQ: Common Questions on Invoice Financing