SME Invoice Finance: What is it? How does it work?

A common problem faced by Small & Medium Sized Enterprises (SMEs) are delayed payments from customers. With many transactions being wholesale or larger in nature, it’s normal for companies to have grace periods for payment of goods or services, but this creates the potential for late payouts, which in turn can lead to other consequences.

One of these potential consequences is cash flow issues. This can cause serious problems such as having insufficient funds to pay your staff, cover rent, and any other logistical fees you need covered. However, one solution that is readily available in Singapore to counter this problem is invoice financing.  

What is invoice financing and how can it help your cash flow needs?

In essence, invoice financing is an avenue for small or medium-sized businesses to borrow money off the pending payments from their customers to gain short term capital. As a result, this gives you greater flexibility and freedom, compared to continuously waiting for these delayed payments. Normal tasks such as paying your employees on time, funding other logistical needs, and investing in your business all become stress-free decisions for you and give you greater peace of mind. 

What is the difference between business loans and invoice financing?

While both methods provide you with funding for your business, the processes are substantially different. Business loans are almost always a more tedious and painstaking method to gain capital, while invoice financing is a lot more flexible and is a better immediate cash flow solution. Obtaining a business loan usually involves stringent background requirements, sometimes even before you can start applying. 

Additionally, the interest rates for business loans can be very costly for SMEs, have a very long contract (12 – 24 months), and the amounts offered are usually insufficient for the requirements of the business. Even after going through the tedious application process, banks may still reject your application due to their own internal guidelines. In comparison, invoice financing is a more flexible option as you can decide which invoice amounts and dates you would like to finance, and gives you greater control over your financial decisions. 

What is the difference between invoice factoring and invoice financing?

Invoice financing involves securing a loan from a lender based on the current outstanding invoices you have. In comparison, invoice factoring is the process of factoring companies purchasing your pending invoices directly.   

Invoice Financing

This method involves businesses receiving an up-front figure by lenders based on the total valuation of the invoices, usually around 80% – 90% of the total amount. It’s also the more discreet option between the two, as it involves businesses themselves collecting the outstanding payments from customers directly and not the lenders. Once the full payments are received, you would then proceed to repay the lender the amount agreed upon including various fees and interest rates. 

Invoice Factoring

Meanwhile, invoice factoring involves a business selling its outstanding invoices to a factoring company, which is a company that purchases a business’s unpaid invoices at a discounted rate. Most factoring companies in Singapore generally pay between 75% – 85% of the total valuation of the invoices. Following this purchase, the factoring company would then be newly responsible for collecting outstanding payments from customers. 

However as these factoring companies are collecting the remaining invoices, it’s important to note that this process allows customers to be aware of the arrangement between your business and the lender. This could impact any future dealings with them. 

Opal’s invoice financing solutions for SMEs

If you’re an SME or any other business and are searching for ways to finance your invoices, or effective handlers for processes such as payment, remittance or financing solutions, our team at Opal (One account for Payment and Loans) is the choice for you. Our all-in-one banking platform offers a range of best-in-class financing solutions and  a single destination to fulfil all your financial-business needs. This means greater convenience and attractive terms for you. Learn more about how our services can provide you with the positive cash flow you need to accelerate your business.

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