📬 One Helluva Drug: The Invoice Financing Trap

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Send me your stickiest CFO dilemmas (anonymously if you wish), and I might answer them in the Mailbag.

👉 Send me your questions by filling out this form.

Now, on to today’s Mailbag.

We’ve got some great topics. Here’s what’s on tap:

Now, let’s get into it.

InfraCFO from the UK asked:

I am CFO of a fast-growing service company. Most of our funding requirement sits in Working Capital. I'm in an ongoing fund raise, and it's been suggested we consider invoicing financing.

While I think the suggestion is sound, I've heard some criticisms suggesting it's difficult to get out of or can be challenging if the business doesn't continue to grow.

Do you have experience and any thoughts on this funding type?

Do I have experience with invoice financing, InfraCFO? Without giving too much away, let’s just say… yes. I’ve basically got a PhD in what this stuff looks like when it gets overused.

A wise man once told me, “Invoice Finance is one hell of a drug.” He is right.

Invoice financing (IF) can be a very useful tool when applied properly. For fast-growing service businesses with long cash conversion cycles or lumpy working capital dynamics, it can smooth timing issues and support growth without immediate equity dilution.

But there are some serious health warnings.

First, too many businesses let invoice finance become a permanent part of their capital structure. That’s dangerous. When you do that, you are effectively one sales slowdown away from blowing a hole in your liquidity. It works beautifully on the way up and brutally against you on the way down. This is a special watchout in LBOs. It’s a good lazy way to find debt capacity.

Second, IF requires disciplined, forward-looking cash forecasting. Businesses that don’t have that muscle tend to get blindsided. This is an especially common problem in smaller businesses.

Third, when sales decline, you get hit twice. You lose contribution margin on the sales, and your funding availability decreases at the same time (your AR book is smaller). All the reasons IF feels so good during growth are precisely why it hurts so badly in a downturn.

Fourth, the facilities often come with concentration limits, eligibility rules, and technical covenants. Lose one big customer, change billing patterns, or have a dispute spike, and you can find availability pulled (or reduced) just when you need it most.

IF is effective when used occasionally and intentionally. If you get the business hooked on it, it’s very difficult to get off.

Banks love selling this product. They can often lay off the credit risk to insurers and earn a clean margin, so they push it hard and price it attractively versus unsecured or amortizing debt. That doesn’t make it bad, but it does mean you need to be clear-eyed about why you’re using it.

My general rule is simple: use IF as a valve, not a foundation. It’s great for timing mismatches and supporting bursts of growth. If it starts to look like a permanent funding requirement, that’s your signal to put in more durable capital, whether that’s equity, longer-term debt, or structural changes to working capital itself.

TLDR: Invoice finance has a place, especially for funding growth, but it’s dangerous if it becomes structural. Use it as a tool, not a crutch, or it will turn on you the moment growth slows.

New York Islander from the US asked:

When you hear or read about what an SMB can learn from a PE playbook, what do you immediately think of as it relates to the role of the CFO in an SMB?

This is a really interesting question, New York Islander.

Because there is a huge amount that an SMB CFO can learn from the PE playbook. But just as importantly, there’s a lot they should not copy.

Let’s start with what not to do. It’s more fun.

An SMB typically has very different objectives from a PE-owned business. Most SMBs exist to provide a reliable income stream for the owner, preserve optionality, and steadily grow value over time. That fundamentally changes decision-making (and time horizon).

PE is often willing to sacrifice long-term value for near-term outcomes because of fund timelines and IRR math. An SMB doesn’t need to play that game. In NPV terms, an SMB has a much lower “cost of equity capital.” Where a PE fund might happily trade $2 in five years for $1 today, an SMB usually shouldn’t.

The same applies to leverage. PE structures businesses aggressively because they have tools that an SMB doesn’t. Recaps, equity injections, refinancing relationships, and fund-level support all change the risk profile. What is dangerous in an SMB context may not actually be as dangerous as it looks inside a PE portfolio.

If you blow up an SMB with debt, especially with personal guarantees in the mix, you can take the whole thing down. So don’t copy PE’s capital structure playbook.

Now, what should an SMB CFO steal from PE?

Discipline and rigor.

When PE is done well, it’s a masterclass in execution. Clear value creation plans. Relentless measurement of the few things that actually drive value. Tight operating cadence. No tolerance for fuzzy accountability.

That mindset translates extremely well to SMBs.

PE-backed businesses are very explicit about how value gets created, who owns each lever, and how progress is tracked. SMBs often rely on intuition and heroics instead. A CFO can professionalize that without turning the place into a PE caricature.

Cash flow is the other big one.

PE’s obsession with cash isn’t just philosophical; it’s enforced by debt service. That fixed obligation becomes a forcing function for discipline. An SMB CFO can recreate that pressure without the actual leverage.

One simple trick is to create an “artificial” debt service. Even if it’s just sweeping a fixed cash amount into a separate account each month. Manage the business as if that sweep were debt service. It sharpens decision-making very quickly.

TLDR: SMB CFOs shouldn’t copy PE’s leverage or short-termism, but they should steal its discipline, cash obsession, and value-creation rigor, without putting the business at existential risk.

Boutique CFO from Cape Town asked:

As a salaried CFO of a small boutique private equity firm for 8 years, how would you negotiate a share of the carry of the fund/alignment of interests?

Understandably, I'm not bringing new deals and creating value, but my role enables them to create value by not having to deal with everything I get done.

Hi Boutique CFO,

Thanks for the question, and all the best in Cape Town. Stunning part of the world.

I don’t know the exact market convention for CFOs of PE funds, but my hunch is that it is rare to get a meaningful share of fund carry in a pure back-office CFO role.

Carried interest exists to align incentives and create uncapped upside for the people who directly create value. And you actually said the quiet part out loud yourself: you’re “not bringing new deals and creating value.”

I hate to tell you, but… that’s not a world-class pitch for participation in the carry.

‘Enabling’ the front office to create value is important, but that is fundamentally what your salary is paying you for.

So, bluntly, I think negotiating meaningful carry purely for running the fund’s finance, compliance, reporting, and operations is wishful thinking in most firms. You might get a discretionary bonus pool, co-invest opportunities, or some form of synthetic upside, but true carry is unlikely.

Value in a PE fund is created in two places:

And it is crystallized at exit.

If you want real alignment with carry economics, you need exposure to one of those two value creation engines.

The most obvious path is into an operating role. Becoming a portfolio company CFO is the cleanest bridge. Do a full 3–5 year value creation cycle inside a business. Help deliver the exit. Take a real slice of equity or deal-level carry. If you do that well, two things happen: you earn a meaningful windfall, and you reposition yourself inside the firm as a value creator rather than a cost center.

At that point, a conversation about carry at the fund level becomes much more reasonable. Either as a repeat operating CFO, an operating partner, or eventually a hybrid role that straddles fund and portfolio work.

TLDR: Fund CFOs are usually paid well in cash, not carry. If you want upside, you need to move closer to where value is actually created (and the fun is had).

A few of the biggest stories that every CFO is paying close attention to. This is the section you might not want to see your name in.

The world’s largest carmaker says the move will speed up decision-making as Chinese EV manufacturers muscle into the market. Meanwhile, the outgoing CEO moves upstairs to become Chief Industry Officer (CIO). Whatever that means.

Despite not being named a defendant, a former ADM finance chief had a job offer rescinded as fallout from the company's financial reporting scandal continues. If you find yourself too close to something really grubby, it can be hard to wash that stink off, even if it wasn’t your hands in the mess.

Anosh Ahmed faces federal charges for allegedly bilking millions from the government during his Covid-era tenure at a Chicago hospital. He’s been on the run since 2021. Honestly… the finance profession is not for everyone.

ICYMI, here are some of my favorite finance/business social media posts from this week. Although, TBH, we’ve been slacking a little bit because we’ve been glued to the Olympics this weekend.

But here’s the comedy gold we found for you between binge-watching speed skating:

So far, only four people have managed to unlock the coveted Boardroom Elite status in SimCFO. Navigating the choppy waters of a cash crisis, a breached debt covenant, and a gruesome M&A negotiation, among others.

Congratulations to the current 4 highest scorers on the SimCFO Leaderboard

No-one (yet) has managed to achieve the elusive highest status: “Legendary Operator”. Looking forward to seeing who gets there first!

Let me know what you thought of today’s Mailbag. Just hit reply… I read every message.

In Saturday’s Playbook, we started a deep dive into CFO storytelling. Check out the newsletter here.

Disclaimer: I am not your accountant, tax advisor, lawyer, CFO, director, or friend. Well, maybe I’m your friend, but I am not any of those other things. Everything I publish represents my opinions only, not advice. Running the finances for a company is serious business, and you should take the proper advice you need.