What Is Invoice Financing?
Invoice financing, or receivables financing, is a form of short term financing that allows a business to borrow against their customers’ unpaid invoices. It differs from the typical unsecured business term loans, because businesses pledge these invoices or account receivables as collateral to receive funds upfront. This business practice is also known as factoring, or factoring invoicing.
Businesses that provide goods or services in bulk to other businesses usually do so on credit. This means that payment is not due immediately, but on a fixed date sometime in the future. In such cases, businesses commonly issue invoices to their customers as an official notice containing the total amount and due date agreed upon by the buyer. Such arrangements are more common in business to business (B2B) operating models, highlighting the significance of invoice financing in facilitating efficient cash flow management for businesses.
However, offering credit as payment terms to buyers can come with disadvantageous consequences. Unpaid invoices tie up the sales revenue that could have been reinvested to grow the business. As a result, the narrowing cash flow diminishes the business’s profitability. For example, businesses who submitted their invoice to Vendors@Gov for their goods and services may need to wait 30 days or more before receiving payment, depending on the payment term provided. With invoice financing in Singapore, your business can increase working capital and maintain your business’ ability to pay for its operating expenses, thus facilitating business growth. Your business will also be able to retain cash flow for urgent needs that may arise unexpectedly.
Hence, invoice financing could be a way for your business to overcome the problems that arise from unpaid invoices. By pledging your invoice to a private funder, you can immediately obtain funds based on a fraction of your invoice amount.
Invoice Financing Vs Factoring
Factoring
Think of this as selling your invoices to a third-party company. They pay you a percentage of the invoice amount immediately, and they then collect the full amount owed from your customer. You are essentially selling your future income for cash right now.
Invoice Financing
This is borrowing money against your unpaid invoices. A lender gives you a loan based on the value of your outstanding invoices. You are still responsible for collecting the money from your customers, but the lender provides you with cash upfront.
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Invoice Financing |
Factoring |
|
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Invoice ownership |
Business that creates the invoice owns it |
Factoring company that buys the invoice becomes the owner |
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Invoice collection |
Handled by the business that created the invoice |
Handled by the factoring company |
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Financial company’s fee |
A percentage on the amount of cash advance (aka loan) will be charged |
The invoices are purchased for less than their actual dollar value |
Is Invoice Financing Right For My Business?
As an SME owner, you know the struggle of juggling cash flow. That’s why invoice financing is a game-changer. It’s like having a magic button for your outstanding invoices, letting you focus on what you do best – running and growing your business.
Benefits of Invoice Financing in Singapore
1. Immediate Access To Funds
Invoice financing provides you with immediate access to funds tied to your account receivables, increasing your working capital and speeding up your business lifecycle. This ensures that your business will also have access to funds when urgent needs arise. With Poss Capital, you can receive funds within 48 hours of approval. This means that you can be paid as soon as an invoice has been issued to your customer, instead of having to wait for their payment.
2. No Additional Collateral Required
Invoice financing is based on the value of unpaid invoices, rather than tangible assets. The invoice itself is being pledged as collateral. Therefore, no additional collateral is required. You will not be putting any other business assets at risk.
3. Flexible Credit Terms
With invoice financing, you will now be able to offer longer credit terms to your buyers, since you can convert your invoices to available working capital before the due date. Hence, you will be able to attract more established customers, who usually favour longer term contracts.
4. Business Growth Opportunities
With increased access to funds, you can invest in initiatives that foster business growth, such as expansion or marketing campaigns. Focus on growing your business without having to worry about delayed payments with invoice financing.
What Are The Eligibility Requirements For Invoice Financing?
The eligibility requirements for invoice financing vary from different lenders. Generally, your business needs to:
- Sell goods and/or services on credit: This means you provide products or services to customers and expect to receive payment later.
- Have a minimum annual income: Most lenders require a business revenue to be at least S$100,000 per year.
- Have invoices for past sales: Proof of sales in the form of invoices will enable you to be eligible for invoice financing.
Payd By Poss
At Poss, our purpose is to lend a helping hand to growing SMEs in Singapore and help you achieve your business goals. With this in mind, we have a fuss-free online application and quick approval process, allowing you to gain access to your funds in no time.
- Invoice financing of up to S$100,000 split into 3 equal repayments
- Factor fee from as low as 1.2% per month
- One time disbursement fee of 5% deducted upfront
- Transparent fees. You’ll always know exactly how much you have to pay.
- No prepayment penalties. Pay off loans faster without getting penalised for it.
However, some requirements for invoice financing are applicable:
- Credit terms on the invoice must not have lapsed
- Sole-Proprietorship and Partnership are ineligible at this moment
- Key stakeholders within the business will be requested to provide personal guarantees for the loan.
How Do We Differ From Other Invoice Financing Providers in Singapore?
Payd by Poss does not offer an invoice financing line with a pre-approved credit limit. Instead, it considers individual invoices submitted during each application. Find out how much you can receive with our Payd invoice financing calculator here.
We understand that a lump sum repayment immediately after receiving your invoice payment would drastically impact your cash flow. Hence, we divided repayment into 3 equal amounts payable, letting you better manage your business cash flow.
Which Industries Would Benefit Most From Invoice Financing?
Invoice financing is most useful for businesses that have recurring monthly invoices and trade with long credit terms. Some such industries are:
Government Contractors
Government contracts are great because they are almost guaranteed to be paid. But there is often a long waiting period. Invoice financing can help you get cash upfront so your business don’t have to wait.
FMCG Suppliers to Supermarkets
Supermarkets often take a long time to pay their suppliers (sometimes up to 120 days). This can tie up your cash flow and make it hard to grow your business. Invoice financing can help you get paid sooner.
Employment and Labour Agencies
These agencies such as security guard services firms and construction foreign workers manpower supply companies typically pay their workers every month, but their clients might take more than 30 days to pay them. Invoice financing allows better cash flow management, especially when it comes to salary payment.
Building & Construction Industry
Construction projects take a long time to complete, but employees and subcontractors need to be paid on time. Projects also often involve a large initial capital outlay, further stretching cash flow pressures. Utilising invoice financing can help mitigate cash flow pressures, allowing the construction business to manage their projects more efficiently.
Access Working Capital Solutions For Your Growing Business
Maintain smooth operations and seize new opportunities with Payd, Poss Capital's flexible invoice financing solution.
Apply NowFAQs about Invoice Financing in Singapore
Invoicing financing is a type of short-term financing that allows SMEs to get cash upfront based on their unpaid invoices. This can help to improve cash flow and avoid waiting for customers to pay their bills.
Invoice financing and short-term loans provide cash upfront, but invoice financing is specifically tied to your unpaid invoices, often has lower interest rates and a faster approval process. Short-term loans are based on your overall business health, have higher interest rates and a longer approval process.
Typically, businesses with a good credit history, established operations, and a steady stream of invoices are eligible. However, specific requirements may vary between providers.
Costs can include interest rates, processing fees, and other charges. It's essential to compare offers from different providers to find the best terms.
The approval process can vary, but it's generally quicker than traditional loans. Some providers can offer same-day or next-day approvals.
Typically, invoices for goods or services sold on credit are eligible. However, there may be restrictions on certain industries or types of invoices.
Imagine you're a furniture manufacturer who sells a large number of chairs to a big department store chain. Instead of immediate payment, you agree to sell the chairs on credit, meaning the department store will pay you at a later date.
To keep track of this agreement, you issue an invoice to the department store. The invoice lists the details of the order, the total cost of the chairs, and the agreed-upon payment date. This invoice serves as a formal record of the transaction.
While you're waiting for payment, your cash flow might be tight. To address this, you could use invoice financing. This means you can pledge your invoice to a financial company. They'll pay you a percentage of the invoice amount upfront, and they will collect the loaned amount at the agreed upon date(s) from you. This helps you get the cash you need without having to wait for the department store to pay.
If you're experiencing cash flow challenges, need to accelerate growth, or want to reduce the risk of bad debts, invoice financing might be a good option. It's best to consult with a financial advisor to determine if it's the right fit for your specific needs.
