Invoice Financing: Here’s Why You Should Take Advantage Of It

** For The New Savvy readers, SmartFunding is offering a sign-up bonus of S$75 (Investor Wallet) for all readers signing up until 31/01/2017, click here.

Invoice financing is a rising option for businesses in Singapore. With that said, you should start looking for ways to take advantage of it.

In 2014, a The Straits Times article that revealed how Singapore has the most number of unpaid invoices among the Asia Pacific countries. The study was done by the largest credit insurer in the world, Atradius. They revealed that 41.5% of invoices have passed their due dates without any payment.

Additionally, the collection of these invoices poses as one of the biggest challenges of businesses in Singapore. A big percentage of transactions in the country is done on credit. If this continues, it will compromise the businesses’ cash flow leading them into debt and bankruptcy. While most invoices are ultimately paid back, the late payment often causes significant cashflow problems for SMEs.

The company’s profit and finances are tied to every invoice. A late penalty can compromise the financial growth of the business. It can hinder the company from making crucial investments. We cannot do anything to change how we use credit terms in business. However, there is something that we can do with unpaid invoices.

We call it invoice financing.

What is invoice financing?

To further understand what invoice financing is, you have to learn what factoring means. According to a 2015 article published by the Singapore Business Review, the International Chamber of Commerce is to standardise factoring. It can only be assumed that this is in response to the growing popularity of one concept of factoring – invoice financing.

The concept of factoring confuses many due to heavy financial jargon. Terms such as debt factoring, receivable financing are often used interchangeably and not clearly defined.

ICC will define it in such a way that it will fall into both factoring and invoice discounting.

A) Factoring:  Involves having a factor (bank or financial institution) take over the receivables’ ledger of your business – including debt collection. This means your client will know that their invoice is factored.

B) Invoice Financing: You can choose which invoice you want to sell to the factor and you can also choose to keep it confidential from the client.

When should businesses use it? When business owners find that finances are running low due to unpaid invoices, they are forced to borrow money. The loan that you will borrow is meant to sustain the overhead expenses of the business while waiting for the invoices to be paid.. Oft-times, this becomes an unhealthy debt cycle that poses an unnecessary risk in the business.

These loans are often inflexible and easily abused. It goes beyond the simple process of borrowing only what is needed and paying it back when you can. There are other factors to consider like the minimum term and the high fees associated with the application and processing of the loan. It takes time to apply for a loan and small businesses are sometimes rejected after waiting for weeks or even months – without being told of the reason why. This can push the cash flow even further into the red.

With invoice financing, debt is no longer a necessity. Instead of borrowing money, entrepreneurs have the option to sell their unpaid invoices to banks and other financial institutions. These invoices will be sold at a discount. The concept is more flexible than taking out a loan and more SMEs typically qualify for it as an Invoice can be used as a collateral.

Usually, the Invoice Financing company will pay for up to 85% of the value of the invoice. For instance, if the unpaid invoice is worth S$10,000, the companies will immediately receive up to S$8,500 for it, and the rest once their customer repay the invoice. This will enable the business to improve their cash flow despite the fact that the client’s payment for the invoice is still 60 or 90 days away.

In most cases, the sales value of the invoice is released by the company financing it within 24 hours after it is raised. This transaction can be confidential or disclosed – it is really up to the business how they want it to happen.

Whenever you apply for a loan or finance an invoice, always make sure you ask the provider of the funds for a detailed overview of all fees and interest charged and choose a partner that provide a simple and transparent fee structure that will help you to avoid any unpleasant surprises.

How can invoice financing help out?

Now that you understand how invoice financing works, it is time to discuss how it can benefit your business.

Here are the advantages of invoice financing.

• It improves your current cash flow. Most credit terms mean you have to wait 30 to 90 days before you get paid. That means your profits and overall cash flow will be unavailable until then. With invoice financing, you can free up this money immediately by selling it at an agreed discount. That way, you can use it to invest on the company’s profitability and future expansion, pay suppliers, or at least to finance your overhead expenses.
• It gives you an alternative source of funds. Usually, when cash runs low, your company will apply for a loan to help pay for new supplies or to keep the business going. This is no longer necessary with invoice financing. You can simply sell your receivables and get immediate access to your funds.
• It helps keep your credit low. Since you are not forced to be in debt, you do not have to worry about your credit sheet. In case something happens that can only be financed by a loan, your debt level will not be too high to hinder you from borrowing a high business loan.
• It keeps your company competitive. If the cash flow gap is no longer a problem, you have all the freedom to offer better payment schedules for your clients. It is a great way to attract more clients and keep the old ones loyal.

Of course, you still have to be careful in selecting the invoice that you will choose to finance. Use only what you need and when you need it. There is no use in compromising the value of the invoice if you do not have to. Since this is not a loan, you have all the freedom to use the money however you want. Make sure it goes into an expense that will help improve the company and take it to the next level.

How do you invest in invoice financing?

Invoice financing does not only benefit companies, but also individual investors. There is a rising option for peer-to-peer invoice financing where investors can choose to finance outstanding invoices of SMEs in Singapore. It is actually a part of a crowd funding movement that started in the UK but is now a growing practice in the US, Europe, and Asia Pacific. In fact, it is fast rising in China and has now gained a stronger foothold in Singapore.

So what makes this different?

From the term peer-to-peer (P2P), the invoice will not be financed by factors but by investors in the community that can invest as little as S$100 per invoice. Unpaid invoices of SMEs will be viewed by P2P investors who can choose which ones seem most promising for investment. Each deal will be provided with comprehensive information to help investors make the right decision when choosing an invoice.

Sandra Ernst, CEO of SmartFunding

SmartFunding provides investors and SMEs with a platform that will make invoice financing transactions easier. Sandra Ernst (CEO), Benoît Anger (COO) and Diego Rojas (CTO) lead the team of talented professionals in SmartFunding. All three have at least 10 years’ worth of experience in various financial sectors.

SmartFunding is currently applying for a CMS License and setting up an Escrow Account. With a strong Credit Assessment Team, SmartFunding aims to help investors manage their risks effectively. The platform intends to thrive on building a community of trust and transparency. In return, strengthening the benefits that invoice financing can provide to both investor and SME.

They are currently expanding their client base of Invoice Sellers, enabling Investors to choose from a variety of invoices. As well as to diversify their portfolio and build their investor base on the way to prepare for scaling in the future.

** For The New Savvy readers, SmartFunding is offering a sign-up bonus of S$75 (Investor Wallet) for all readers signing up until 31/01/2017, click here.