Aside from small business loans, did you know that invoice factoring can be of great help too? This is essential especially when you struggling with financing.
Among the most common problems faced by business owners is financing. Sometimes there is a need for additional funds to keep the business going – this is especially true when you are in a challenging business environment like Singapore.
Sometimes, it is hard to find the financing needed to run and grow your business, especially when you are an SME. Unlike big corporations, lenders and investors are sometimes hesitant to invest in small business owners. On the other hand, did you know that there is invoice factoring that can help you?
Invoice factoring can be of great help, especially when your business is struggling with cash flow. And, with this post, we will provide you with the best guide about invoice factoring. Let us uncover how it is vital to address your financing problems.
What is Invoice Factoring?
Invoice factoring is a kind of financing where businesses sell their account receivables to a third party or a financing institution- also referred to as account receivable factoring or debt factoring.
By doing this, you can receive an upfront fund based on your outstanding invoices. Financial institutions can provide up to 90% of your accounts receivables. This is essential in getting quick funding and improve your cash flow.
Also, in this type of financing, financial institutions can directly collect the payment from the customers. Thus, you can see that invoice factoring can help you get quick funds and collect payments from your customers.
How Does Invoice Factoring Work?
The factoring process in Singapore may vary based on your industry. However, it may commonly follow these steps:
- You apply to a financial institution to sell you outstanding invoices, and you will send a copy of your invoices.
- The financial institution will review your application and provide you an upfront payment of 80-90% of your outstanding receivables.
- The financial institution will collect the remaining account receivables.
- You will be receiving the remaining value with deducted fees from the financial institution,
- You will observe in the process that the financial institution helps you save time in collecting your account receivables.
Is Invoice Factoring a Good Idea?
With unexpected cash flow problems, invoice factoring can be of great help. But, is it ideal for your business. In this section, let us discover the advantages and disadvantages of invoice factoring in Singapore.
The Pros of Invoice factoring
Improve your cash flow
Unlike business loans from banks or other financing options, invoice factoring can help you get an immediate fund to answer your cash flow needs. It can bring in more money to fund your ongoing projects or business opportunities. It is also essential, especially during this pandemic.
Invoice factoring is ideal if you need a quick short-term financing option and you don’t want to wait for your customers’ payment.
Have lower or no credit score requirements
Just like borrowing for a business loan from licensed moneylenders, the financial institution that offers factoring may not require a minimum credit score. If they need it – it will be a low credit score.
Accessible to new businesses
Most startup companies or newer businesses find it difficult to access financing help during their initial years. But, unlike business loans, invoice factoring can help new businesses.
Even if your business exists in less than a year, you have the chance to apply for invoice factoring in Singapore. Unlike borrowing business loans from banks, invoice factoring mostly requires a year of existence.
No Collateral Needed
Since you will be selling your outstanding invoices, there’s no need for you to provide collaterals.
No Need for Repayments
With invoice factoring, no need to remember your repayments after you sell your invoices. There’s no need for you to track your loan repayments.
Saves Time in Collecting Outstanding Invoices
As you sell your account receivables, the financial institution will be the one to collect your customers’ payments. There’s no more hassle of waiting and collecting your customers’ payments.
Have More Time to Focus on Your Business
With invoice factoring, you don’t need to take the hassle of finding additional funds and collecting your customers’ payments. You have quick access to funding your business operations and opportunities. With this, you have more time to focus on your operations, analysing the competition, understanding your customers, and more.
Get quick funding without incurring debt
In selling your outstanding invoices, you have the opportunity of getting access to quick funds. And, this also means that you are free from debt. Thus, you can have the focus on thinking about the other aspect of your business.
The Cons of Invoice Factoring in Singapore
Aside from having benefits, invoice factoring has some disadvantages.
It involves costs
Since the financial companies will be managing your outstanding invoices, it also means that you have to pay the fees. It can be expensive and not ideal as a long-term financial solution.
Not Ideal for Bigger Projects
If you will be working with bigger business opportunities, invoice factoring is not ideal. The cash advance you can get is not enough to fund larger projects. It is better to take a business loan.
It’s a liability
In the case of late payments of your customers, you will be responsible for it. It can affect the fees that you’ll need to pay. It may also affect your reputation.
Is Your Business Eligible for Invoice Factoring?
Financial institutions or factoring companies may have varying requirements. Overall, you will observe that they offer flexibility In terms of requirements. As mentioned earlier, it may not require you with collateral and credit score.
Below are the considerations of factoring companies:
- Outstanding invoices value. Financial institutions may require to have a minimum value of invoices to be eligible.
- Invoice due date. These companies can consider invoices for up to 90 days.
- Your Clients. Factoring companies will consider invoices from other businesses or government agencies. However, if you are working with consumer sales, you need to consider a merchant cash advance.
- Business information. Factoring companies may require you to have been incorporated in Singapore with at least 30% shareholding and have an ACRA.
When applying for invoice factoring, always remember to check the fine print. You must have a clear understanding of the terms and conditions.
Invoice factoring can be ideal for the type of business that deals with others businesses and government agencies. You can take advantage of its benefits, wherein it can provide you access to quick funds. However, invoice financing is not viable as a long-term financing solution.
Can’t Qualify for an Invoice Factoring in Singapore
If your business cannot qualify for invoice factoring or even with a merchant cash advance, you can consider getting an SME loan. To find the right lender, you can use our form here. We can help you find the right lender that can provide you access to quick financing.