SMEs often rush to secure financing for growth and operations, but it's important to understand that rushing into getting a loan is not always the best option. Instead, SMEs should take a step back and consider the various loan structures available, as choosing the wrong one can result in higher interest rates, unfavourable repayment terms, and financial distress. One loan structure often overlooked by SMEs is invoice financing.
Invoice financing allows a company to receive a loan based on its outstanding invoices with buyers, enabling SMEs to unlock cash from their unpaid invoices for growth and scaling. The financing period aligns with the payment terms on the invoices, saving wait times of up to 120 days, as offered by OCBC. Invoice financing is efficient as you only borrow and pay for what you use, unlike a business term loan which is a lump sum payment over several years. Invoice financing, supported by invoices, also often has more affordable interest rates as compared to the traditional business loan.
When considering invoice financing, businesses should ask themselves if they:
If the answer is yes to these questions, a business may consider this loan structure to fund its invoices. Invoice financing is a popular financing structure in several industries, including manufacturing, services, wholesale and retail trade, and construction.
For efficient operations, it is crucial for manufacturing businesses to have adequate resources to acquire necessary materials and manage a substantial workforce. Along with the typical payment terms of 60 to 90 days faced by any business, manufacturers may also encounter unexpected expenses such as repairs or replacements of critical equipment, which can disrupt production. Invoice financing provides a solution, allowing manufacturers to fulfil customer demands and manage additional costs simultaneously.
Favourites in this segment include F&B manufacturers that sell to large supermarket buyers in Singapore, as their buyers who are well-known brand names such as Sheng Siong and Fairprice and have payment terms of up 60 days. The quality buyers will allow banks more confidence when they assess your credit.
Service companies are often heavily dependent on human capital as a resource. Unlike suppliers where matching credit terms can be extended, salaries of employees must be paid promptly within the month without delay. This can create stress in cash flow when salaries need to be paid in advance of cash inflow. Matters can worsen when there is a delay in payment from customers. Invoice financing can be a quick solution, allowing service companies to ease their cash outlay and support more business.
Favourites in this segment include government service vendors such as education providers and event organizers, who often have significant cash expenditures such as material purchases, equipment leases, and salaries. Although deposits received can cover a portion of the cost, it typically only covers 10 to 20% of the total bill. Credit terms offered by vendors are typically between 30 – 60 days and invoice financing can help these service companies improve their cash flow at affordable interest rates.
In the competitive wholesale market, where differentiation is limited, it is not just the one that offers the best price that wins. It is often a combination of price and payment terms that makes the winning contract. This is because end buyers are also suppliers, and they want to match the payment terms they can give to their buyers. The distribution sector can sometimes face payment terms of up to 120 days. Thus, the ability to access funds at the start of the payment cycle allows a wholesaler a competitive advantage to offer better terms.
Wholesalers and distributors must also be able to take advantage of market demand and supply imbalances, which occur within a short window. Having the ability to cash out receivables using invoice financing can provide ready funds to seize opportunities and take advantage of favourable prices.
The construction industry is well-known for its high expenses, including the costs of materials, labour, and equipment. Delays in payment from contractors and sub-contractors are also common, as there are multiple layers in the industry. Invoice financing can provide a contingency for cash flow tight situations, allowing construction companies to receive payment for completed work more quickly without having to wait for clients to pay their invoices. This improves business cash flow and gives construction companies more time to chase payment without severe disruption to their work.
A favourite in this segment is the trucking and transportation services for materials, as many trucking companies have many expenses that must be paid before their goods are delivered, such as fuel, driver salaries, tolls, and insurance. Additionally,
there may be times when the business needs additional funds for equipment purchases, supplier reimbursement, and vehicle maintenance. Invoice factoring allows trucking companies to obtain fast capital instead of waiting for payment on outstanding trucking bills, helping them cover the costs of transporting their next load.
Invoice financing is a suitable solution for Small and Medium-sized Enterprises (SMEs) across various industries, providing the flexibility to access capital for operational expenses or to take advantage of opportunities, even in the face of changing market conditions.
A business may consider making an application with their existing bank or with OCBC through OCBC Short-term Financing. This option allows for borrowing and paying only for what is used, at an interest rate of 0.6% per month for up to 120 days, and for up to 80% of the invoice amount. Furthermore, the digital process offered by OCBC enables invoices to be uploaded through OCBC Velocity, with funds being received as soon as one working day, reducing the need for paper-based processes.
a. No, unlike factoring and accounts receivable purchasing, with invoice financing, the buyer continues to pay directly to the business's bank account rather than the bank. The buyer will also not be notified of the financing arrangement.
a. Two fees are typically involved, including a processing fee charged per invoice, and interest charged over the loan period. Late charges may also apply.
Jennifer loves helping SMEs in their business growth journey. She is also an epicurean and has perpetual wanderlust. During the weekend, she weaves poems out of thin air and buries herself in books.