How often do businesses invoice a client and receive payment right away? Especially for projects that cost hundreds of thousands of dollars, it may take weeks or months for the client to perform the necessary steps to make payment.
At the same time, raw materials and other supplies need to be purchased before the start of the project. Since the project may take months to complete, payment may only come in months after the raw materials need to be purchased.
Delays in payment to suppliers may cause delays to the project, which may also force the business to give up on some other opportunities as a result. Keeping large sums of buffer cash is a possible solution to this, however in this case the opportunity cost is business expansion.
Read Also: Complete Guide To Enterprise Financing Scheme – Fixed Asset Loans (EFS-FA) In Singapore
Loan Based On Invoice
How invoice financing works is that the bank steps in as your buffer in two ways. The first is when you send an invoice to a customer, the bank pays you upfront for this invoice, and this cash can be used to pay business overheads. When the customer finally makes payment, this sum is returned to the bank, and the bank charges an interest.
The second way is when a supplier sends you an invoice. The bank pays the supplier upfront, and you return the money to the bank with interest. This is useful for projects such as renovation projects, where raw materials such as tiles are needed at the start of the project, but the customer only makes payment after the project is completed satisfactorily, which could be a couple of months later.
Essentially, Invoice Financing is a sort of loan that loans cash to you based upon an invoice. OCBC Invoice Financing charges interest at 0.6% per month, and you can receive up to 80% of the value of the invoice in cash.
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Fixed-Term Loans More Suitable For Expansion
One crucial difference as compared to other business loans is the fact that Invoice Financing is tied to invoices. Unlike other loans, which limit the eligible amount of loan and stipulate a fixed repayment, which ties the amount your business can loan to the volume of business sales.
Invoice Financing is designed to be a short-term loan to buffer against payment delays, as compared to other business loans, such as a commercial property loan and business term loan, which are designed with more long-term needs and long-term repayment structures in mind. While it is still possible to loan the sum of money upfront through a business term loan, you will be paying interest on that loan whether the money is spent or kept as a cashflow buffer in the bank.
In comparison, you only begin paying for interest for Invoice Financing at the point where the bank sends you the cash.
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Invoice Financing Vs. Short-Term Loans
While Invoice Financing can help ease cashflow, it may not be suitable for unforeseen expenses, especially if it cannot be repaid in a short span of time. For this, other forms of short-term loans such as the Revolving Term Loan is more suitable, giving a maximum credit of up to $200,000, where the company can draw down flexibly up to $200,000 to deal with unforeseen expenditure.
While short-term loans such as Revolving Term loans can also be used to help ease cashflow, there is a minimum sum to be loaned, and the regular repayment schedule may be administratively troublesome.
Ultimately, Invoice Financing is most suitable for cases where you are expecting that you will be able to repay the loan in a short span of time, and this will usually be the case that you are expecting to receive a similar amount in revenue.
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