This article will provide more details about topics covered in our video.
In this video, we interviewed Lee Kheng Leong, the Asia Chapter Director of Factors Chain International (FCI), about some key benefits of invoice financing (aka invoice factoring).
Invoice Financing, Receivables Financing, Factoring or Accounts Receivables Purchase?
In Singapore, financial institutions use these terms interchangeably, contributing to the confusion of small business owners, and obscuring the meaning and usage of these terms.
Invoice financing generally refers to any banking product that uses an invoice as a reference for borrowing capital.
This includes financing products that are initiated by both buyers and suppliers.
In a normal business cycle, the manufacturer (supplier) issues invoices and the buyer receives invoices.
An invoice financing product initiated by the supplier to fund its working capital is usually referred to as Receivables Financing; using their receivables to get financing.
On the other hand, an invoice financing product initiated by the buyer to fund its purchase of goods is usually referred to as Purchase Financing; seeking loans to finance their purchases.
This is another word that the industry uses interchangeably.
Discounting = Financing.
Discounting describes one of the processes of invoice financing. A financial institution will usually provide invoice financing to a client based on a discount (financing only 80% of the total invoice value).
Fees and interest will be collected from the 20% retained and any leftover value will be returned once the financial institution has collected the payment from your debtors.
This is how each product works. Once you understand who initiates the loan, you can understand how each product functions.
In most cases, only one party communicates with the bank; unlike factoring where everyone communicates with the bank.
As mentioned in the video, you sell your invoices in a Factoring arrangement and pledge your invoices in a Receivables Financing arrangement.
Legally, this small detail means that in a Factoring arrangement the bank has the legal right to sue your customers on your behalf if they fail to make payment.
We have more videos coming up. Stay tuned!
Edited by: Paul Hong
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