Invoice financing to raise cash to meet SMEs financing needs is becoming the popular choice for SMEs. The rise of the peer-to-peer marketplace is fast becoming the clever alternative to bank loans to support SMEs financing activities. Traditionally, young companies have to build up their operating history and creditworthiness over many years before they are eligible to apply for a bank loan. During this period, many SMEs miss out on many good opportunities as they are often constrained by insufficient cash flow.
Since the subprime financial crises in 2007-2008 banks have tightened their lending criteria. Even those credit-worthy companies are finding it more difficult to obtain a loan especially SMEs. Banks prefer large companies as they have a longer operating history and more assets. This leaves the SMEs in a vacuum in terms of getting the appropriate level of funding.
The situation is further aggravated by long credit terms sometimes as long as 90 days imposed by its customers. One can deduce the huge amount of resources that is tied up when a finished product or service is delivered but is only paid 90 days later.
So how does this modern era Invoice funding help support SMEs financing needs?
The SMEs register with an Invoice financing platform. Unlike traditional banks that require a long operating history and assets security, modern invoice finance platforms do not require assets as security and only require a short operating history of 6 months. It is worth mentioning that the quality of the debtor company having a good credit rating carries a higher weightage than the SME itself. The registration process is swift; it takes up to 3 days to register as compared to banks which could take months to process!
Once the SME is registered it can post its invoices on the platform to be advanced with cash. The amount advanced is usually between 70 to 90% of the Invoice face value depending on the invoice age, when it is due and the creditworthiness of the payee. The time frame between posting the invoice and receiving the cash can be as fast as 24 hours.
The platform collects on the outstanding invoice pays the financiers the agreed fees and their capital and returns the balance to the SME. The typical fee is between 0.6 to 1.4 % per month for SMEs financing needs.
Smart companies have shifted their paradigm. Instead of applying for bank, they are adopting fast and efficient invoice financing marketplaces instead. With this method, companies are able to obtain cash from their own invoices without further increasing debts. This is definitely a great solution to support SMEs financing needs to support their growth and assist in working capital financing.
