If your SME struggles to stay ahead of the game, you can choose invoice financing or invoice factoring. These are viable options that will help you get the money you need quickly.
MPM Capital is a platform that helps you find the best and most affordable business loan in Singapore. Be it invoice factoring or invoice financing, we have sufficient resources to assist you.
Now, back to the question, is invoice financing or invoice factoring better for SMEs?
The problem is that these forms of SME financing sound similar, and unfortunately, many people in the industry use the two concepts interchangeably.
There’s the problem: You won’t know which solution is best for your business because you can’t tell them apart.
We’re here to help.
Read the article below to find out what sort of SME financing is best for your company.
What Is Invoice Financing And Invoice Factoring?
The short version is that both invoice financing and invoice factoring are types of business loans. They allow you to receive a quick amount of cash based on your invoices.
Thus, you can pay your utilities, ensure daily operational costs, or even sign a new contract.
This sort of SME financing won’t help you expand your business like a more massive sum of money, but it will help you stay afloat and seize new opportunities. That’s because you won’t have to wait a long time between receiving payments from various clients.
As you can see, the basic idea is that both invoice financing and invoice factoring are secured loan arrangements between two or three parties, including:
- You, aka the SME owner
- The company or companies who bought things from you and to whom you’ve issued invoices
- The financial institution who will give you a loan to cover the value of these invoices so that you can have your money sooner than the usual sixty or ninety days
Note the term “secured;” both invoice factoring and invoice financing are loans offered against an asset, which is your invoices. While this loan won’t be more significant than the collateral, you’ll still get a sufficient amount at low interest. Besides, your approval chances are higher because the moneylender doesn’t face a massive risk of losing the money they’ve lent you.
If your buyers are trustworthy brands or government agencies with renowned standing on the market, your chances of getting this loan are virtually 100%. That’s a huge consideration, especially if you have a low credit score or your company is new. In this case, most banks may refuse to grant your SME a traditional business loan.
If you are rejected by banks, do not worry. There are other financial institutions that are willing to finance your business.
What Is Invoice Financing?
Invoice financing is an umbrella term that encompasses various ways how you, the SME owner, can secure your cash faster based on your invoices.
When you finance your invoice, you’re actually using them as collateral – pledging them – just like in the case of a mortgage loan or pawnshop loan. So, instead of waiting the 30-90 day period until your buyers reimburse your invoices, you can get that money immediately.
Here’s the problem: You won’t get the entire sum. Pledging your invoice, aka invoice financing in Singapore, brings you a maximum of 80% of its value or a maximum of $500,000 – whichever is higher.
So, if your invoices amount to $20,000, your financier will grant you $16,000 tops. If your invoices are worth $700,000, you’ll only obtain $500,000 because this sum is lower than 80% of your invoice’s value.
That doesn’t mean you’re only getting 80% or $500,000 of your bills’ value. That would mean at least 20% worth of profit for your financier.
Instead, you’re getting that 80% now and, when your buyers pay their invoices, you get the entire sum. Use this amount to reimburse your lender’s principal loan amount and interest.
Is Invoice Financing Worth It?
Let’s evaluate! Now that you know the basics of invoice financing, let’s see if it’s a reliable solution for your business:
Advantages:
- You’re getting 80% of the money you’re owed now instead of waiting days or months for the entire sum. Thus, you can take advantage of new business opportunities quickly.
- The buyer doesn’t have to know you’re taking this type of business loan. That means you have complete rein of this transaction and its conditions.
- You won’t have to explain your decision, look for another financier or another form of SME financing if your buyer dislikes the idea of pledging your loans.
Drawbacks:
- You have to make sure your buyers reimburse their bills. That means lots of follow-ups if your clients aren’t reliable or face some challenges themselves.
What Is Invoice Factoring?
Remember how we said that invoice financing is an umbrella term? Well, invoice factoring is one of its babies.
Although they sound similar, it’s easy to tell these two concepts apart because:
1. Invoice factoring involves all three parties, aka you, your buyers and the lender. By comparison, invoice financing is an arrangement that excludes your buyers.
2. Invoice factoring means your lender will buy the invoices from you. Conversely, invoice financing means simply pledging your invoices.
These two differences have a slew of implications:
- You have to be more transparent with your buyers.
- The buyers have to be okay with reimbursing their bills to someone else. Companies that can make the established deadlines have no problems in this regard. Buyers who foresee some money issues in the future consequently want to leave some room for negotiations. These people may not agree to invoice factoring.
- You can get up to 90% of the invoice’s value or up to $1,000,000 – whichever is higher. 10% may not seem like a big deal, but sometimes this amount can make or break your business’s expansion.
Well, invoice factoring can come in handy when your business is facing cash flow issues.
Is Invoice Factoring Worth It?
Let’s look at some advantages and disadvantages with invoice factoring as well:
Advantages:
- You no longer have any legal responsibility or interest in pestering an untrustworthy buyer. Invoice factoring means the buyer now has to pay or negotiate new terms with your lender. Therefore, you have more peace of mind and more money in your bank account.
- You’re more likely to get that extra 10-20% remaining from your bills because buyers who sign invoice factoring loans aren’t expected to run with your bill money.
- The lender is likely to grant you more money.
Drawbacks:
- The transaction’s reins are out of your hands because you’ve sold your invoices to a moneylender. That means the bank is now the owner of those invoices.
- Some buyers may not want you to do invoice factoring. As we explained above, these clients are potentially not confident enough about paying their bills.
- You’ll need some expert negotiation skills when you explain to your clients why you need that third-party lender involved in your relationship. Some buyers may perceive your company as risky, and you have to explain why that isn’t the case.
Bottom Line
Invoice factoring and invoice financing are affordable, convenient, and sure-fire business loans. Both alternatives offer a much-needed cash influx to solve your problems and flourish your company.
You can pay for your daily operations, purchase fantastic equipment, or seize a once-in-a-lifetime opportunity. MPM Capital is your one-stop platform to secure the best business loan in Singapore. If you have questions, WhatsApp us at 8873 9263 or contact us right now!
