Invoice Financing (English version)

Invoice financing is a credit product where customer invoices are treated as underlying documents in a loan application for borrowers to get immediate cash at a discount. When a customer pays the invoice, the borrower can repay his loan. Invoice financing terms range between 15 to 90 days, typical of most invoice cycles.

Why Would Invoice Financing Be Good for Me?

Primarily, invoice financing provides additional cash flow for small businesses and SMEs. Small businesses need constant cash flow, no matter their profits. Perhaps an SME needs more cash flow for business operations or to finance a new project that must start immediately.

Certain businesses need running cash flow more than others. For example, a wholesaler always needs more stock inventory. If most of its income is tied up in invoices, its cash cycle will be negatively impacted.

The process of getting upfront cash is also significantly faster through invoice financing than other business term loan products.

How Does It Work?

In exchange for a loan, a potential borrower offers his unpaid customer invoice to an invoice financing company as the underlying document for credit assessment. The invoice financing company performs an assessment on the potential borrower and if a contract is agreed on, the invoice financing company will advance a percentage of the invoice value to the borrower. The advanced amount varies from company to company; overall loan to value range is around 70-80%.

Once the unpaid invoice is settled, the invoice financing amount can be repaid and resolved. Invoice financing is generally repaid through a one-off full payment on the contract due date.

The mechanics of invoice financing depends on which product category you choose.

Invoice Factoring vs. Invoice Financing

Invoice factoring

In invoice factoring, the loan provider (creditor) legally buys customer invoices and takes over the collection process. Your customer must be informed of the factoring contract, as the creditor becomes the party who charges invoice value from customers. Your customer in turn pays his invoice directly to the factoring company.

With invoice factoring, invoice collection is no longer the borrower’s responsibility. Invoice factoring can help borrowers focus on their businesses, but potential borrowers should make sure their customers trust them enough to deal with an invoice factoring company.

Invoice financing

In invoice financing, the responsibility of customer invoice collection still falls on the borrower. The invoice financing company’s (creditor’s) main role is to provide financing to the borrowers.

Invoice financing itself is divided into two subcategories: notified invoice financing and non-notified invoice financing.

Notified invoice financing

Here, the customer is notified that the borrower has an invoice financing contract. The customer then resolves his invoice by paying the invoice financing company directly, not through the borrower.

For an example of the notified invoice financing process, see the flowchart below:

IF SG, MY, INA eng-100

Non-notified invoice financing:

In a non-notified invoice financing contract, the customer is not informed about the invoice financing agreement. To resolve the invoice, the customer pays to the borrower first, then the borrower transfers funds to the invoice financing company.

Important Note:

Non-Notified Invoice Financing as a loan product is currently not available in Indonesia.

For a clearer view of the non-notified invoice financing process, see the flowchart below:


Both forms of invoice financing have their pros and cons.

Notified invoice financing:

  • Notified invoice financing is less risky for creditors, which is why interest rates are lower.
  • If customer trust or relationship is not affected by knowing about the invoice financing agreement, you can get a really good deal with regards to total cost.

Non-notified invoice financing:

  • Some borrowers do not want to disclose their loan agreements, especially when it concerns their customers.
  • Offers borrowers more control and privacy
  • Because non-notified invoice financing is riskier for creditors, borrowers are generally charged with higher interest rates.

If a potential borrower has a choice between notified invoice financing and non-notified invoice financing, which loan structure to select depends on what is right for the business. Consider customer relationship and business situation, among other factors.

Notified invoice financing sounds similar to invoice factoring. There is one major similarity: in both models, customers pay creditor platform directly.

But there is one key difference: In notified invoice financing it is the borrower’s responsibility to charge unpaid invoices until the customer has paid.

In invoice factoring, the creditor platform has taken over the job of collection process for invoices.

Costs of Invoice Financing

There are two main costs to consider when applying for invoice financing. The main cost is how much interest you have to pay. After performing credit assessment, an invoice financing platform will charge its borrower with an interest rate. Interest rates for invoice financing in Modalku start from 12%, based on credit assessment.

The other cost is a service or management fee. Generally, this is around 3% of the advanced invoice amount. Certain forms of invoice financing have higher service rates. Factoring, for example, has more expensive service fees than invoice financing as the factoring platform has taken over the task of invoice collection and would want more fees for the service.

But as in any form of financing, costs and rates vary depending on your invoice financing provider. Always check for hidden fees.

Case Study

The example below is an illustrative story for notified invoice financing:

A food and beverage company buys ingredients from a wholesaler for a total cost of Rp 500 million. The food and beverage company has 30 days to settle the invoice. But the wholesaler needs to buy more stock inventory immediately, which is why they choose to take a notified invoice financing agreement.

After the food and beverage company is notified of the financing deal, the invoice financing company decides to advance 80% of the invoice value (Rp 400 million), then deducts a service fee of 3% (Rp 12 million). Rp 388 million is loaned to the wholesaler.

At the end of the invoice cycle, the food and beverage company should have directly paid the invoice financing company Rp 500 million (full invoice value). In turn, the invoice financing company releases the remaining 20% of invoice value (Rp 100 million) subtracted by interest costs as per loan agreement.

Invoice Financing, a Summary:

  • In an invoice financing agreement, a borrower offers his customer invoice as the underlying document in a loan application. The invoice financing platform will advance a percentage of the invoice value, which the borrower will repay once the customer has resolved his invoice.
  • If you need a quick hit of cash flow and have invoices on hand, invoice financing is the loan option for you. The process of invoice financing, from application to disbursement, is much faster than other term loans.
  • But if you need a larger loan amount or long-term credit, you may have to look elsewhere.
  • There are three major options within invoice financing: invoice factoring, notified invoice financing, and non-notified invoice financing.
  • Non-notified invoice financing as a loan product is currently not available in Indonesia.
  • Invoice factoring and notified invoice financing require borrowers to inform their customers of the credit agreement.
  • In non-notified invoice financing, your customers are not informed of the invoice financing agreement.
  • Because non-notified invoice financing is riskier for creditors, interest rates are generally higher than for notified invoice financing.
  • However, non-notified invoice financing offers borrowers more control and privacy.
  • When looking at invoice financing options, consider the product, the interest rates, and the service or management fees.

Anda juga dapat mengakses informasi tentang tips-tips keuangan, gaya hidup, produk keuangan, hingga alternatif investasi di Awali kebebasan finansial dengan memperkaya literasi keuangan bersama kami. Ayo jelajahi blog kami!

Artikel blog ini ditulis oleh Modalku, pionir platform pendanaan digital bagi UMKM di Indonesia dan Asia Tenggara. Kami menyediakan pinjaman modal usaha bagi Usaha Mikro Kecil dan Menengah (UMKM) tanah air dan membuka opsi investasi alternatif dengan pengembalian menarik bagi pemberi pinjaman.

Modalku memenangkan Global SME Excellence Award dari ITU Telecom, salah satu badan organisasi PBB, di akhir tahun 2017. Modalku juga memenangkan Micro Enterprise Fintech Innovation Challenge yang diselenggarakan oleh United Nations Capital Development Fund (UNCDF) dan UN Pulse Lab Jakarta di tahun 2018. Visi kami adalah memberdayakan UMKM untuk bersama memajukan ekonomi Indonesia.

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