Invoice discounting (or accounts receivable financing), is a form of short term financing method where businesses are able to unlock cash flow by selling off outstanding invoices as a collateral. With this working capital solution, the business can tap into working capital in a simple and faster way.
Benefits of Invoice Discounting
Businesses that offer credit payments to their clients can run into trouble even when they are generating revenue. For example, late payment of invoices can cause a business’s cash flow to be imbalanced, unable to pay expenses as payment is still yet to be received for another 30, 60 or 90 days. Invoice discounting, not only can be a good funding option for businesses it can also helps businesses to grow further through the following means:
1. Funding operation with an injection of working capital
With invoice financing, businesses are able to release cash flow which is locked in your accounts receivable. Let’s say you own a wholesale business, selling goods to supermarket creating a $10,000 invoice. Your customer agrees to pay off the invoices in 60 days. However, you need the cash next week to pay your employees and to purchase more inventory. You’ve got a cash shortfall. Invoice financing allows businesses to sell the $10,000 invoice for an immediate cash to help your business with operating expense like paying your employees and purchase more goods.
2. Enabling businesses to take on opportunities
Business opportunities such as partnerships and potential ideas can happen any time. Such opportunities usually require much resources before they can fully materialise. Having access to funds when needed allow businesses to take advantage of any business opportunities as and when they arise.
Invoice financing will also grow with businesses. It can provide significantly more cash than bank financing or bank overdraft. The cash amount available is reactive to your business growth, meaning there is no need to worry about outgrowing the available cash from your loan or overdraft.
3. Freeing up time and energy for the bigger picture
Without working capital, the management spends time and energy finding funds in order to keep the company in business and repay liabilities. Having less worries about cash flow problems means businesses can use these precious resources to mark and meet bigger goals for the growth of your business.
4. Improving the reputation of your business
With working capital, businesses are now able to pay suppliers promptly and increase their credit worthiness. This creates and maintain a healthy relationship between your suppliers, thus giving you more bargaining power to potentially negotiate for lower prices.
5. Finance on a confidential basis
Some businesses’ clients may lose confidence with their suppliers when they realise that their suppliers are facing financial difficulties. This may affect relationships, possibly even losing deals and contracts. Invoice financing allows businesses to be financed without their clients’ knowledge, allowing businesses to strengthen the relationship with the client.
Will Invoice Discounting suit your business?
Invoice discounting can be a good financing option if your business fits in the following:
1. Sells good or service to credit worthy customers
Invoice financing financiers usually look for businesses which sell goods or services to large credit worthy customer. As the risk is very much relying on the ability of the customer to repay, customers such as government agencies, MNCs, listed companies will be more favorable to the financier.
2. Experiencing high growth
Businesses which are experiencing high growth often need much working capital injection to obtain more resources and/or goods. Invoice financing allows businesses to tap into cash flow as and when they need to help fuel the growth.
3. Long payment term
Business that have long payment terms with their clients tend to experience cash flow challenges. This results in an imbalance in the financial situation of the company. Without working capital, the business is unable to cope with its operating cost and face trouble in producing further goods and services. Invoice discounting is a short term financing solution to unlock cash in invoices.
4. Meeting the financier’s eligibility criteria
Various financiers have different eligibility criteria before businesses’ invoice can be financed.
InvoiceInterchange offers invoice discounting services for SMEs that meet the following criteria:
- Singapore registered company
- Sells services or products to other businesses
- Minimum annual turnover of SGD 250k
- Minimum of 6 months operating history
- Sells to at least one large customer (e.g. public listed, blue-chip companies, MNCs)
If you are looking for financing ways to resolve cash flow problems or to fund the growth of your business, our invoice discounting solutions may be just the right financing option for you. Speak with us today.
Munnery, J. (2016, February 2). What is invoice discounting? Is it the right finance facility for my business? Retrieved from Real Business Rescue, link
touchfinancial. (n.d.). 7 Ways Invoice Discounting Could Help Grow Your Business. Retrieved from touchfinancial, link