Invoice financing allows businesses to borrow based on invoices that they are owed by their customers. This provides SMEs with a great short-term financing option with lower interest rates than other short-term financing methods.
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How Does Invoice Financing Work?
Invoice financing allows businesses to obtain loans based on the value of payments they are owed from their customers. Lenders typically offer financing up to 70 - 90% of a businesses total invoices. This funding is usually offered for short durations, ranging from 15 days to 1 year. Invoice financing is considered less risky for lenders compared to other short-term financing, as the borrower has already delivered to customers and has a reasonable expectation to be repaid. Therefore, interest rates are generally lower than other short-term loans.
There is a more complete picture of crowdfunding platforms' invoice financing terms compared to banks' terms. That being said, banks tend to be more selective when offering funding and generally offer lower interest rates than crowdfunding platforms.
Typical Characteristics of Invoice Financing
|Financing Amount||70 - 90% of invoice value|
|Financing Duration||15 days - 1 year|
|Annualised Interest Rates||6 - 20%|
|Success Fee||2 - 5%|
|Revenue Requirement||S$100,000 - S$500,000|
|Cash Disbursement||3 days - 1 month|
Can Invoice Financing help my SME?
Invoice financing is a good short-term financing option for SMEs with a significant amount of accounts receivable in the form of invoices. It provides financing with lower interest rates compared to other types of short-term financing. Additionally, some lenders offer cash disbursement within 3 - 7 business days.
However, SMEs without significant invoice amounts would be better off considering other types of financing like general purpose working capital loans. Additionally, most lenders have a revenue requirement of at least S$100,000 for invoice financing applicants. This may prevent smaller or younger companies for receiving this type of funding.