For small businesses in Singapore, managing cash flow can be a significant challenge, especially when delayed customer payments affect financial stability. Late payments often create cash flow problems that can disrupt day-to-day operations and stunt business growth.
The good news is that businesses can sell or use unpaid invoices to get immediate access to cash. This process is generally called invoice financing which is a broad and general term. This term is also generally used by banks when they offer trade facilities.
This is where you might ask what then is factoring? Factoring is in fact a subset of invoice financing where the financing is more structured and where the borrower, the lender and the buyer are involved. Many banks prefer to offer the more unstructured version of invoice financing instead of factoring and you will find factoring typically offered by non-bank financial institutions.
Invoice financing and factoring are powerful financial solutions that allow businesses to access quick working capital by leveraging unpaid invoices. These cash flow solutions are crucial for businesses looking to maintain liquidity, avoid disruptions, and grow their operations, even in the face of slow-paying clients.
Therefore, in this blog, we will delve into the key differences between the two.
Invoice financing is a working capital solution that allows business owners in Singapore to access immediate funding by pledging unpaid invoices to a financier. This form of short-term financing enables businesses to receive quick cash flow without waiting for clients to pay their invoices.
Typically, invoice financiers provide up to 70%-90% of the invoice value upfront. Once your client settles their outstanding balance, you’ll repay the financier, including any pre-agreed interest rates and transaction fees. This financing option is particularly beneficial for businesses that need to cover immediate operational costs, like payroll, inventory, or suppliers, while waiting for clients to pay.
For invoice financing that is offered by the banks, the financier deals only with you and does not have any contact with your client or the buyer to whom the invoice is issued. This makes it very palatable to many borrowers. Banks simply approve a list of buyers that the borrower may submit their invoices for and they will finance the credit terms that are indicated in the invoice.
Read More: 7 Benefits of Invoice Financing for Small Businesses
Invoice factoring is yet another way in which business owners in Singapore can obtain funds earlier from their unpaid invoices. Like invoice financing, they also pledge unpaid invoices to a financier. And just like invoice financing, you will receive up to 90% of your unpaid invoices as funding.
The main difference in this case is that the financier takes on the responsibility of collecting all unpaid invoices. On successfully recovering payment, you receive any remaining funds minus agreed upon fees. This is in fact one great benefit of factoring as it frees up time from your collections/finance team.
In invoice factoring, your clients or buyers are directly involved in the process, whereas in invoice financing, financiers typically do not interact with your customers. Because factoring requires notifying your buyer about the financing arrangement, some businesses may feel hesitant or embarrassed. However, the reality is that many large MNCs are already very familiar with factoring, and the notion that using such financing signals weakness is simply an outdated mindset.
1. Quick Access to Working Capital
Both invoice financing and factoring offer businesses in Singapore fast access to working capital. Typically, you can unlock 70-90% of the value of your outstanding invoices almost immediately, helping you cover operational costs, payroll, and other urgent financial needs. This makes invoice financing and factoring ideal for businesses facing cash flow gaps due to slow-paying clients.
2. No Credit Check Required
Unlike traditional business loans, invoice financing and factoring do not require a credit score check. Since the funding is secured against your accounts receivable, your business’s creditworthiness does not impact your ability to access funds. This makes it an attractive financing solution for startups and small businesses in Singapore, even if they have little to no credit history, or less-than-ideal credit scores.
Read More: How Invoice Financing Improves Cash Flow and Business Growth
1. Limited to B2B Businesses
One key limitation of invoice financing and factoring is that they are typically available only to B2B businesses, those that issue invoices to clients for goods or services rendered. Retailers or businesses operating in B2C models may find it challenging to access these types of funding since they generally don't issue invoices in the same way. This makes invoice-based financing more suitable for businesses with longer payment cycles and established relationships with clients.
2. Dependence on Customer Payments
Both invoice financing and invoice factoring come with the risk of increased costs if customers delay payments. Since these financing methods are secured against outstanding invoices, the cost of borrowing is directly tied to how quickly your clients settle their debts. If clients take longer to pay, the cost of borrowing may increase due to higher interest rates in invoice financing or additional fees in invoice factoring. In the worst-case scenario, a delayed payment can lead to mounting fees over time, affecting your business's cash flow and overall financial health.
Although both invoice financing and invoice factoring can improve cash flow, they serve different business needs. When deciding between the two, consider the following factors to determine the best option for your company:
1. Available Human Resources
For small businesses or startups in Singapore with limited staff and resources, invoice factoring may be the better choice. With invoice factoring, the responsibility of collecting outstanding payments shifts to the financier, freeing up your team from time-consuming tasks like chasing overdue invoices. This can be a major advantage for businesses that lack dedicated collections departments or struggle to keep up with invoicing.
2. How Does Your Business Operate?
If your business has close relationships with clients, getting a third party involved, such as in invoice factoring, could create friction. Explaining to your clients why they need to pay a financier instead of your business directly may be challenging. This could affect trust or the ongoing client relationship. In such cases, invoice financing might be a better fit, as it allows you to maintain control over your client interactions while still improving cash flow.
3. Do You Have Slow-Paying Clients?
Invoice factoring could be the right solution if you're dealing with slow-paying clients. Since factoring involves a third-party collections team, businesses often see faster payments, reducing the risk of clients defaulting on invoices. If your clients tend to delay payments or need additional encouragement to settle debts, choosing invoice factoring may be the best way to ensure timely payment and access to working capital without risking further delays.
Read More: Clearing Misconceptions about Invoice Financing in Singapore
Ultimately, the best approach for managing your company's cash flow depends on your unique business goals, whether you prioritise maintaining customer relationships with invoice financing or outsourcing collections and risk with factoring.
Both options offer ways to improve cash flow, but they differ in how they handle customer relationships and the level of control you retain over the collections process. The critical step is choosing the right financial partner with terms and costs that align with your needs. And we can help.
Sign up today to compare invoice financing offers from banks, money lenders and other financial institutions on our platform. For more information, you can reach our loan experts here.
Benjamin heads up Lendingpot with a background in all things SME. He was previously a commercial banker at Citi with experience in Relationship management, Credit Risk, Trade Operations and Corporate FX sales; and understands the difficulties SMEs face in this opaque world of SME financing.
