Invoice Financing: Driving SME Growth

Consider this scenario: you close a major contract with an enterprise client. This is your big break as an SME—the deal that will propel your profits to a level you’ve so far been unable to reach. You make a list of materials you need to buy and a timeline for production. Then you consult your financial records.

Or perhaps you’re in the opposite boat. A major project has just ended or a client has switched to another vendor. While trying to close more contracts, you need finances to tide you over until the next month. You consult your financial records.

And you spot a problem—a couple of clients haven’t paid their latest invoice. A week and a few phone calls later, they still haven’t sent you their checks.

If you’re an SME owner, I’m sure you’ve been in either or both situations before. At Validus, we encounter SMEs like you every day—people who need cash to grow and expand their business, or simply to keep operations running.

You’re not alone. In 2014, the Straits Times reported that Singapore had the most number of unpaid invoices in the Asia Pacific. A related study in 2017 revealed the same results. (However, it also showed that Singapore businesses had shorter payment periods than their counterparts in the Asia-Pacific).

Delayed payments often hamper cash flow, resulting in a loss of productivity and competitiveness for an SME. A lack of cash can prevent businesses from taking advantage of a spike in customer demand, fulfilling project obligations, or expanding operations. In fact, poor cash flow is the main cause of failure for 82 percent of small businesses.

So where do you turn?

A massive financing gap

Typically, the first resort for SME loans is the bank. There’s just one problem—eight in 10 SMEs in Singapore do not qualify for traditional financing, such as bank loans.

Around half of SMEs in the country earn less than S$300,000 a year and have low operating cash flow, making them unqualified for bank financing. Traditional loans require businesses to have been around for three years, cutting off funds from startups at their earliest stages. They also require collateral in the form of machinery or owned real estate, which service-oriented SMEs are rarely, if ever, able to provide.

In addition, banks tend to prefer bigger loan sizes, longer tenures, and high processing times—all of which don’t meet the needs of SMEs looking for a quick, short, small-sized loan.

This inaccessibility of loans has created a S$20 billion financing gap for SMEs in Singapore, threatening their growth and—for some—their survival.

Unfortunately, SMEs in Singapore are hesitant to seek alternative forms of lending, partly because they lack knowledge of non-traditional sources of funds. There’s also the misconception that alternative financing comes with exorbitant interest rates.

One recourse for SMEs is the government-backed Enterprise Singapore, a government agency formed from International Enterprise Singapore and SPRING. Enterprise Singapore offers SMEs various types of loans, including an unsecured working capital loan of up to S$300,000. For some businesses, this is enough to help keep operations moving until the start of the next month; for others, this amount is too low to satisfy growth requirements.

SMEs who require more funds thus end up borrowing from money lenders with interest rates as high as four to seven percent per month. If you’ve done the same, you’ve probably found that their interest rates can go even higher than that. But you take out such loans anyway as a last resort, believing you have no other choice.

But legitimate, viable alternatives to banks and money lenders do exist.

Leveraging invoices through invoice financing

Invoice financing is an alternative lending mechanism that allows SMEs to harness the value of future payments. In exchange for a loan, you submit your invoices to lenders, who in turn collect the payments once they are due.

We offer invoice financing because it eliminates the need for SMEs to provide collateral, but provides proof of future income and lowers lending risks. Because of that, we are able to approve loans within 24 hours typically, and can offer interest rates as low as 1% a month.

In our experience, the SMEs that require financing most often come from the marine, manufacturing, shipping, logistics, construction, services, and F&B sectors. One F&B distributor, for example, faced the problem of having to wait several weeks for accounts receivables. This temporarily limited their cash flow.

They turned to invoice financing as a solution, as they needed a short-term loan that could be approved within days and that didn’t require extensive paperwork or collateral. By exchanging their invoices for funds, they were able to maintain the business’ liquidity and grow inventory. All in all, invoice financing helped that F&B company raise its annual revenue by 20 percent.

Supporting SMEs’ sustainability and growth

There are a few reasons why we’re able to offer such favorable terms to SMEs.

One, we are a platform for investors, meaning different people provide funds that SMEs can borrow. We have close to 200 investors who receive an average net internal rate of return of eight to 15 percent.

Two, we have developed a proprietary credit algorithm model in conjunction with the Credit Research Initiative at the Risk Management Institute of the National University of Singapore. This gives us a holistic view of SME borrowers from a credit and fraud risk perspective.

Three, we use machine learning and AI to make lending decisions backed by data. These technologies help us improve our credit scoring and fraud detection capabilities.

Lastly, we maintain a low default rate owing to robust internal checks and controls.

Supporting Singapore’s economy by helping SMEs

To date, we have facilitated over 15,000 loans and raised more than S$450 million in funds for SMEs. Together with other alternative finance platforms, Singapore’s strong regulatory environment, and a vibrant startup ecosystem, we aim to support the sustainability and growth of SMEs in the country.

After all, SMEs play a vital role in Singapore’s economy. They comprise 99 percent of the country’s 220,100 businesses, employ two-thirds of the workforce, and contribute 49 percent of GDP.

As the government puts it, SMEs are at the heart of our economy. Cash is the lifeblood that keeps SMEs alive. As an alternative financing platform, our role is to ensure the continuous flow to boost or maintain SMEs’ cash flow for growth.