Invoice Financing and its Opportunities for Fintechs
- MD Finance Team
- Apr 1
- 5 min read
Updated: Apr 2
Invoice financing represents one of the largest niches in supply-chain finance (SCF), fulfilling the banking sector's fundamental promise of financing the working capital necessary for any business to operate. However, smaller and less funded enterprises face barriers to accessing SCF, particularly invoice financing.
Digital adoption, fintech innovation, blockchain, and tech acceleration are forecasted to stimulate the market. In the latest MD Finance report, we invite you to explore invoice financing across various markets, its regulatory models, and how fintech innovations can accelerate growth in the sector.
The invoice financing market looks promising for fintech companies because of the growing number of small and medium-sized enterprises (SMEs). According to Statista, there were approximately 358M SMEs worldwide in 2023. Also, McKinsey reported that nearly 80% of eligible assets do not benefit from better working-capital financing. Many catalysts — including digital delivery, fintech innovation, industry utilities, and API technologies — stimulate cheaper and more accessible supply-chain financing.
New fintech products emerge globally in the invoice financing sector with receivables platforms that allow SMEs to sell their receivables directly to a wide range of investors and e-invoicing systems. New platforms act as intermediaries that evaluate the receivables using technologies.
How Invoice Factoring Works
Many SME’s are struggling with their cash flow, as customers' typical payment terms are 30 to 120 days. Cash flow issues are one of the major causes of business closures. Using invoice financing, businesses can get money from lenders against the amounts due from customers. Thereby, businesses can pay employees and suppliers and reinvest in operations and growth without waiting until their customers pay their balances in full.
Generally, invoice financing works under the following scheme:
Step 1. A company sends an invoice to its customer with the purchase.
Step 2. The company sells the invoice to an invoice finance company (financier).
Step 3. The company receives 70-80% of the invoice in cash advance.
Step 4. A customer pays the invoice to the financier.
Step 5. After the customer pays the invoice to the financier, the company is eligible for a rebate for the remainder of the invoice minus a fee varying from 1% to 12% or even more of the invoice's size.
The main advantages of invoice financing to SME’s include:
Typically, invoice financing does not require collaterals as security guarantees, as the value of the invoice itself is a security guarantee, unlike traditional loans.
While traditional loans often examine the firm’s business history, making it possibly tricky for new SMEs to get loan approval, invoice financing is concerned with the value of the outstanding invoices instead.
It provides fast access to working capital since invoice financing tends to be quicker than traditional loans.
The main disadvantage is the risk of fraud. The financier bears the risk that the pledged invoice could be false and have zero value.
Invoice Financing Market Overview
Invoice financing is represented globally, especially its most popular direction, invoice factoring.
The biggest markets are in Europe due to a higher density of SMEs relying on invoice financing as an alternative solution and extensive cross-border trade dynamics between numerous nearby countries. There is robust growth in Central and Eastern European markets, where invoice financing has become a core funding tool for businesses.
According to FCI, the invoice finance market is growing annually. Its size increased from €2917.1B in 2019 to €3943.1B in 2024, and the compounded annual growth rate has risen to almost 7%, which is an incredible feat.
Approaches to Market Regulation
The majority of invoice financing markets are dedicated to transparent regulation. The top 10 biggest invoice financing markets, including China, France, Germany, Italy, Spain, and the USA, are regulated. Several large unregulated markets, such as Singapore, Hong Kong, Mexico, and Brazil, also perform well.
The number of authorities and their jurisdictional roles vary from country to country, using two models of factoring regulation.
The integrated model brings within a single authority the supervisory responsibilities towards all segments of financial markets, both from a prudential and conduct of business perspective. The integrated model can differ due to local legislation. Such a model is represented in Columbia, Germany, Japan, and Singapore.
For example, in Germany, the Federal Financial Supervisory Authority (BaFin) is the sole authority supervising all banks, insurance companies, and other financial institutions. Invoice financing is regulated under the German Banking Act. Companies offering invoice financing must apply to BaFin for a license to carry out invoice financing operations.
Multiple authority models mean several authorities coexist in a country and regulate invoice financing. A key determination is whether invoice financing activities should be the responsibility of the authority (or authorities) entrusted with regulating banking institutions and activities. This model includes three types: the institutional (or entity-based), the twin peaks, and the functional model. Hong Kong, China, the UK, and Egypt have applied such an approach.
In the UK, often considered as the classical example of the functional model, invoice financing falls within the regulatory scope of the Prudential Regulation Authority only when regulated financial institutions, such as banks and other finance providers, offer it. However, non-banking financial institutions engaging in invoice financing are currently not regulated by the Financial Conduct Authority (FCA), which focuses on the business conduct of financial services firms.
The demand for a regulatory framework has been growing as financial regulators aim to maintain market stability and transparency. At the same time, invoice finance companies strive to operate under clear rules, advancing confidence in the market and fostering its development.
For instance, the trend to market regulation has been noted in Singapore, where invoice financing is not enumerated as a regulated activity, but some financing groups often operate through licensed companies to provide their services.
Success Cases of Online Invoice Financing
Companies engaged in invoice financing often offer businesses a broader spectrum of financing options. In addition to invoice financing, they offer business loans, revenue-based financing, credit lines, reverse factoring, and even leasing.
The minimum invoice size is $5K, and the maximum number of invoices that can be financed is up to $10M. Companies usually charge as low as 0.15% per 30-day invoice and as high as 4% per 30-day invoice. The interest rate varies depending on the due date: the closer the due date, the lower the interest rate.
Companies financed invoices from $1B-$2B on average in 6 years, but there are players on the market like Octet Finance that have an annual volume of invoice finance of around $4B.
Look at the case of Paramago, a prominent non-banking finance company in Europe. Founded in 1992, Paramago started implementing its online strategy only in 2016. In 2024, the financier provided €572M in funding, financing 395K invoices for 21.5K customers. In September last year, Paramago commenced its international expansion by acquiring Omnicredit, a profitable non-banking invoice financing player in the Romanian market. Paramago is also listed on the Warsaw Stock Exchange.
Read the full report to learn more about the key market players and current trends in online invoice financing: