Investing In Invoice Financing Vs Term Loans

Some of our investors may have already heard of our new product – Invoice Financing. We hope that this post will help to answer some of the FAQs regarding investing in invoice financing and dispel any confusion.

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Q: What is invoice financing?

Invoice financing is a loan product where sellers (“Borrowers” in this case) sell the future receivables or invoices that they issued to their customers (“Debtors”) to get immediate cash, at a discount. When the debtors pay their invoices, investors who bought these future receivables would receive full payment and make a return.

Q: How can invoice financing help SME or small business owners?

A small business, no matter how profitable or healthy, needs constant cash flow. Credit terms of invoices (usually between 30 to 90 days) result in a time gap between delivery of goods/services and receipt of payment. Certain businesses need running cash flow more than others. Wholesalers are a good example – they always need to buy more stock inventory. If most of their income is in accounts receivable, then their cash cycle will be negatively impacted. Invoice financing therefore bridges this gap by providing immediate cash up front and enabling the business to grow.

Q: What are the differences between investing in invoice financing vs term loans?

Compare invoice financing to the more ubiquitous term loan. Invoice financing and term loans have visibly different tenors. Our term loans’ tenors range between 3 to 24 months whilst terms of payment (i.e. tenor) for invoice financing listings range between 30 and 90 days, typical of invoice cycles. Some investors are fond of invoice financing because it takes much less time to get their full principal and interest back.

Another key difference would be the risks involved. As invoice financing listings are secured against the invoices, lesser risk is involved. Furthermore, an invoice financing institution will not advance 100% of the borrower’s invoice to buffer against any unforeseen circumstances. This reserve amount (as we call it), will push the Seller to chase the Debtor for timely repayments as any borrower would want 100% of his invoice back rather than 80% the maximum amount Funding Societies will advance payment for.

The repayment and fee structures differ between the two products as well. For term loans, repayments are on a monthly basis, while service fees are charged at 1% of the monthly repayment. For invoice financing listings, repayments are only made on the invoice due date, while service fees are charged at 15% of the interest earned.

Q: Is the credit assessment of borrowers for invoice financing less rigorous?

At Funding Societies, our credit assessment of borrowers remain rigorous for both invoice financing and term loans.

Monthly reminders and strong infrastructure are put in place to collect repayments to reduce the likelihood of payment delays. Similar to term loans, investors also have access to a detailed loan fact sheet to evaluate each invoice financing listing that we put up.