Invoice Financing for the Post- COVID-19 Business Environment
The COVID-19 pandemic has resulted in new challenges for businesses, making it exceptionally difficult to manage limited cash flows and supply chain disruptions.
According to Deloitte, issues that businesses face include delayed payments from cash-strapped buyers and the inability to pay suppliers for the same reason.
If large corporations find these challenging, imagine the strain small and medium enterprises (SMEs) are now experiencing. Even in ordinary times, SMEs struggle to obtain financing from mainstream lenders. Banks typically require high levels of capitalisation or some form of security for a loan (in some cases, this may include the personal assets of business owners being used as collateral).
In the immediate aftermath of COVID-19, SMEs have limited resources to wait out the pandemic and need more financing than ever. Some SMEs will find that past suppliers are no longer able to deliver to them—or worse, have closed down. This requires finding new suppliers with whom they haven’t had a prior relationship and who may be unwilling to extend credit in these uncertain times.
Industries that are most suited to leverage invoice financing typically offer 30 to 150-day credit terms, such as manufacturing companies, wholesale companies, construction firms, freight brokers, trucking companies, and more.
Invoice financing provides a solution to these critical issues
Business opportunities have not disappeared simply because the pandemic arrived; instead, they have become accessible only to those companies with enough working capital to address them head-on. This is where invoice financing has emerged not only to address cash flow gaps but as a critical mechanism for business growth, particularly for SMEs.
Using this method, a lender (not necessarily a bank) provides a loan against an existing invoice. For example: say an SME has an invoice for an order worth $100,000. However, the customer is unable to pay for some time.
A financing platform might loan the SME a percentage of invoice—say $80,000—which the SME can use immediately. Later on, when the customer pays, the SME remits the total amount to the lender ($100,000), with any other interest or fees. Due to this loan’s short-term nature and the smaller amounts involved, interest costs tend to be low.
Invoice financing provides a range of advantages for SMEs, as we’ll discuss below.
1. Invoice financing is more readily available than conventional bank loans
Invoice financing can provide loan approval in as little as 24 hours. All an SME requires (besides being legally registered) is to have its unpaid invoices ready; the lender does not require a long track record, high capitalisation, or other usual strictures of a conventional bank loan.
A conventional bank loan could take many weeks to process; by then, an SME might be falling behind on production—and hence, revenue.
2. There are no minimum or maximum amounts outside of the invoice
The unpaid invoice used determines the loan quantum (for example, up to 80% of the invoice amount). This means SMEs can borrow more closely to the amounts they need. Unlike a bank loan, they won’t face rejection from a loan quantum that is too low or be forced to take a larger loan than necessary.
3. No risk of losing collateral
Mainstream financial institutions may only want to give secured loans to SMEs. This may mean the SME needs to pledge essential assets, such as properties, vehicles, or equipment owned by the SME.
Truth is, some or most SMEs do not have much or perhaps any viable assets to pledge. Invoice financing provides another source of funding if they do not have any collateral required or would instead not put up their homes as collateral.
Coupled with how the loan is capped based on the invoice, this provides a natural barrier against over-leveraging.
Note that collateral-free financing does not equate to zero financial responsibility for business debt on the borrower’s end. They would still have to repay the loan and abide by the terms and conditions set out by the lender.
4. Invoice financing helps preserve the company’s cash flow
Invoice financing means a company doesn’t need to cut corners in daily operation. For example, a company may not need to lower the number of workers to maintain its service quality because of lower revenue.
Healthy cash flow also means the company can better ride out any downturn, such as lower demand for tourism or Food & Beverage outlets during movement restrictions. They may, for instance, have the funds to remain open even though customers have delayed payments.
5. Short loan tenures minimise interest repayment
The longer the loan tenure, the more the company pays in terms of interest. Invoice financing is typically only for short periods and rarely exceeds 12 months (or until the customer pays the invoice, which is likely sooner). As such, the cost of invoice financing often ends up lower than a business term loan.
More importantly, it can help an SME’s credit score to have fewer long-term loans burdening its finances.
Invoice financing; a crucial pillar of SME support in these trying times
Ready access to capital can make a difference for an SME, allowing them to significantly increase their productivity and even grow when many are struggling to sustain their operations.
In the current challenging landscape, invoice financing has become an additional viable option for businesses to obtain short-term financing to meet immediate business needs.
To further strengthen SMEs’ capabilities as they position their business for recovery and growth post- Covid-19, Validus is also providing government-assisted SME loans as part of the Enterprise Financing Scheme.
This includes Temporary Bridging Loan Programme, Enterprise Financing Scheme – SME Working Capital, and Enterprise Financing Scheme – Trade Loans. These government-assisted financing and risk-sharing schemes are part of the Singapore government’s initiatives to support local businesses’ needs, especially during the pandemic. These schemes offer up to 90% risk-sharing when financing is given to SMEs by participating financial institutions (Validus included).
Check your eligibility at validus.sg/efs