Business Loan Series: Invoice Financing

‍Cash is King

In today’s volatile business environment, SME owners need to learn manage their cashflow in a disciplined and organized manner in order, to defend themselves against liquidity shocks, and capture new opportunities that may arise.

This is why we are introducing our second business loan piece covering: Invoice Financing (It is to note that we are referring to sales invoice instead of purchase invoice). Essentially, what invoice financing aims to do is to bridge the big and lengthy gap between revenues and cashflow. This is done by pledging unpaid invoices to financiers in return for an immediate cash advance. The advanced amount is a percentage of the invoice amount that can range from 70-90% of the face value. The tenor will also match the invoice maturity, which can span from weeks to months.

So, if you are a business with significant amount of receivables as a percentage of your assets and extend overly lengthy payment terms to your buyer, invoice financing might be just the right solution for you. This is because the obtained cashflow can help ease liquidity strain; enabling businesses to make good on salaries and rental before cash revenues are received.

Funds made available can also be deployed to finance new business contracts and ensuring that liquidity does not hamper new sales. This is especially when businesses provide generous credit terms to demanding customers.

Below is a quick summary of some of the key characteristics of invoice financing:

1.    Interest Rate as low as 6% p.a. with a factoring fee as low as of 0.25%

2.    Tenor from 14 days to 180 days (up to maturity date of the invoice)

3.    Loan amount up to 90% of invoice value

4.    No double financing is allowed

How does Invoice Financing work? 

Invoice financing is facilitated through a financier who is willing to pay you a % of your receivable for a discount and manage the collection on your behalf. This is typically a more viable and cheaper financing option as compared to a general business term loan as the lender can rely on your buyer to make the repayment rather than your business cashflow. See below for detailed step-by-step process:

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1. Client sells $100,000 worth of electronic products to Buyer A on Day 1 and issues an invoice of $100,000. The invoice has a payment term of 45 days. This means that the buyer A will only pay the client on the 45th day of the sale.

1.  On the 15th day the Client requires $50,000 to purchase new inventory for a new order and requires working capital. Therefore the client sells his receivables of $100,000 from Buyer A to the Financier. The financier then informs Buyer A that the client has sold their invoice to the financier and instructs the buyer to pay the Financier directly on payment due date (45th day).
2. The Financier verifies the information and invoice and advances 90% of the invoice value less a factoring charge ($90,000 less a 0.7% factoring fee)
3. On the 45th day, the financier receives 100% of the invoiced value directly from the buyer. This can be made into the financier’s account or an designated account named after the client.
4. On the same day of receipt of payment, the client will receive 10% of the remaining invoice value from the financier less interest charged of approximately 1% per 30 days. Since financing was $90,000 for 30 days, the interest charged is $900). Total interest and fee paid for the process is $1800 ($700 factoring fee and $900 interest)

In case you might still be confused with some of the jargons used, we have prepared a simple glossary below:

• Financing Amount: Defined as a % of the invoice value (typically 70 – 90%).
• Financing Tenor: The duration from the point of financing to the invoice maturity date
• Factoring Fee: There is often a factoring fee of a % of the invoice value from 0.5-1.0% of the invoice amount. This is usually deducted from the final amount collected from the buyer.

What are the benefits of Invoice Financing?

Free up capital with little requirements

Unlike other sources of business funding, invoice finance is relatively easy to qualify for even for newly set-up companies or companies with stressed financials with no collaterals and guarantors needed.

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Ability to extend payment terms with confidence

Most small businesses have to extend an industry standard of about 30 to 90 payment days to many of their customers, which can add considerable stress to their cashflow. But through invoice financing, such businesses can now afford to extend payment terms more confidently knowing that a financing option is available.

Outsource your collection and monitoring

If you choose factoring, you can let the financier handle the credit control and collection which will better enable you to concentrate and manage your business. This applies to not only local invoices but global invoices as well.

Is invoice financing suitable for me?

While invoice financing is a cheaper option compared to a general business term loan, it might not be suitable for everyone. Below are the 3 key questions that you want to ask in order to determine your suitability.

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1.    Who are your buyers?

This is one of the most important question as your financier will be relying on the credit quality of your buyer on the invoice to make good on his payment, which will be used pay down the advance provided. Thus, if your buyers are large corporates, MNCs, or even government-linked agencies, your invoices are most likely eligible for financing. On the other hand, if you invoice to other small businesses and individuals, your invoices are unlikely to be eligible.

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2.    Do you provide credit terms?

As invoice financing only finance receivables, if there are no credit terms given, this is most likely an unapplicable solution. It is also advisable that credit terms be at least 14 days so that the flat factoring fee charged can be justified.

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3.    How much is your minimum invoice amount?

There are two amounts that you will need to provide. Firstly, you will need to make sure that your invoice amount is at least $10,000 per invoice. This is because, every invoice financing is subject to a minimum factoring fee of $100 and hence a smaller invoice will lead to a factoring fee of more than 1% (not including interest charges). Total invoices per year should also add up to at least $50,000 a year to cover the administrative cost required to set up the facility in the first place.

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Interest Rates 

Now that eligibilities are out of the way, business owners need to understand the various cost of funding. Depending on the credit quality, a business term loan’s interest rate might differ. For most banks, interest rates fall between 5.5% to 12% p.a, while alternative lenders start at 1-3% per month. See table below:

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Typical documents required 

Documents required for a business term loan application is rather straight forward and will typically include the following:

1.    ACRA bizfile (within 3 months)

2.    Past 6 months bank statements

3.    Latest Financial Statements or Accounting statements

4.    Notice of Assessment for at least one guarantor

5.    CBS record for at least one guarantor

6.    Receivables ageing

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Lendingpot is always happy to connect if business owners want to understand more about the loan market. Reach out to us at Ask@lendingpot.sg or drop us a whatsapp at +65 9337 0719

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Leading digital loan marketplace Lendingpot connects SMEs to its network of 45 lenders comprising relationship managers from banks, financial institutions, and private and peer-to-peer lenders in Singapore for free. It aims to help SMEs overcome the information asymmetry problem and lack of transparency prevalent in the SME financing sector by offering SMEs financing options such as business term loans, property loans, revenue-based financing, credit lines, working capital loans, bridging loans, invoice financing, and more.