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What Is Invoice Financing And How Can It Help SMEs In Singapore With Their Cash Flow?

Did you know: Unpaid invoices that your SME business hold can be used to borrow money.


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As most SME business owners would already know, cash flow is the lifeblood of any business. Without cash flow, even profitable businesses can become insolvent.

This is why besides developing and selling products and services that can delight customers, business owners need to focus on cash flow as well. Cash flow isn’t only necessary to keep our company going, but it’s also vital if we wish to expand our business.

As business owners, there are various means to help us improve cash flow. We should keep on top of our cash inflow and outflow to forecast any potential cash flow gaps that may arise in the future. This means keeping tabs on customer receivables, especially if they start taking longer to collect, as well as identifying upcoming bills and expenditures down to payment dates. We can use the Business Financial Management features in OCBC Velocity to help with our financial forecasting.

We can also tap on government-assisted loans such as the Temporary Bridging Loan and the SME Working Capital Loan, or apply for equipment and financing loans and commercial business property loans if we wish to make longer-term investments in fixed assets. These loans help us expand our business in areas that we want to while allowing us to retain cash flow flexibility for our operational needs.

Read Also: 4 Easy Changes To Adopt (At No Cost) To Improve Your Business Cash Flow

While taking bank loans are common avenues we can tap on for funding, they are not the only option. A lesser-known tool that business owners can consider using is invoice financing.

What Is Invoice Financing?

Invoice financing is a way for businesses to borrow money through the invoices that they have issued to customers or invoices from their suppliers that are issued to them.

There are basically two main types of invoice financing for those who are not familiar with the topic – Invoice Financing Purchase and Invoice Financing Sales.

Invoice Financing Purchase

Invoice financing purchase allows businesses to borrow money from the bank based on the invoices that are issued to them by their suppliers. For example, if a purchase of $100,000 is made for materials needed for business operations, the business can apply for an invoice financing purchase with the bank by submitting the invoice related to the purchase.

Once approved, the bank will make payment directly and promptly to the supplier. This removes the need for the business to make immediate payment to the supplier and avoid potential late-payment.

For businesses that require significant raw material purchases before producing a finished product that they can sell, invoice financing purchase solves a potential chicken-and-egg problem, where businesses have to purchase and pay for the supplies they need first before being able to sell the products to their customers.

By using invoice financing purchase, businesses can get the supplies they need first, via the advance funding provided by the bank once they have submitted their invoices. They can then sell the products to customers, before using their sales proceeds to repay the borrowed money to the bank.

Invoice financing purchase comes with interest charges and a fee. For example, OCBC charges a competitive interest rate as well as 0.25% of the invoice amount (with a minimum fee of $100). So, if you have an invoice worth $100,000 that needs to be paid, you will incur interest charges and a fee of $250 for the invoice financing purchase solution.

Invoice Financing Sales

Invoice financing sales is the opposite of invoice financing purchase. With invoice financing sales, businesses use the invoices that they have issued to customers to borrow money from the bank. Once approved, the bank will provide the advance payment to the business based on the invoice sales amount.

Similarly, invoice financing sales also charges interest and a fee. OCBC will charge an interest rate as well as a fee of 0.25% of the invoice amount (with a minimum fee of $100). For a $100,000 invoice that you have issued to a customer, you will incur interest charges and a fee of $250 for the invoice financing sales solution.

It’s worth noting that invoice financing purchase and invoice financing sales are two different kinds of invoicing financing. So if you are looking to borrow money to purchase goods from your suppliers, you will need to use invoice financing purchase. If you want an advance payment on the invoices that you have sent to your customers, you will use invoice financing sales.

Whether it’s invoice financing purchase or invoice financing sales, the amount you get would be considered a loan – and hence there is an interest charge and a fee attached to it. Your company has to repay the amount borrowed back to the bank upon loan maturity. You can also choose to draw down a lower amount than what is stated on the invoice if you do not need to borrow that much. This way, you do not have to pay unnecessary interest charges and fees.

The good thing about using invoice financing (as opposed to other business loans) is that it gives you access to funds when you need it the most. So, if you have to pay your suppliers first, you can use invoice financing purchase. If you already sold products to your customers and are waiting for payment, you can use invoice financing sales to receive your money first allowing you to give your customers a longer credit term.

Invoice Financing Sales Isn’t The Same As Account Receivable Purchases

It is worth highlighting for business owners that invoice financing sales aren’t the same as account receivable purchases financing, though the two may appear similar. Even we were confused initially on this before we read up more.

Invoicing financing sales is considered a loan to our business since the bank is lending you money based on the invoices that you have issued to your customers.

On the other hand, account receivable purchase is structured as a sale of receivables to the bank. This means that you are selling your receivables to the bank in exchange for earlier payment. Similar to invoice financing sales, this allows you to improve your business cash flow by turning your receivables into cash earlier, allowing you to capitalise on other business opportunities that you may have.

Source: OCBC Business – Account Receivable Purchase

As SME business owners, you should keep a close watch over your company’s cash flow, and to identify possible choke points where you may encounter cash flow constraints – you can also use the OCBC Business Financial Management features to keep tabs and forecast cashflow requirements.

Once you are aware that you may face a cash flow crunch, you can consider the various financing tools available to tap on if you wish to, whether it’s invoice financing purchase, invoice financing sales or account receivable purchase. By understanding the various financing solutions available to us, you can ensure that cash flow matters do not hinder your business growth.

If you are an existing OCBC business account user, you can apply for these financing solutions via OCBC Velocity, which is OCBC Bank’s business internet banking platform. Do note that you need to have a trade finance facility with OCBC.

Read Also: Guide To Opening A Business Account For Your Start-Up In Singapore

Need Financing Support During This Period?

SMEs can enjoy extra financing support of up to $3 million through the Temporary Bridging Loan Programme when you apply online with OCBC. Terms and conditions apply.

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