Accounts Payable Vs Accounts Receivable Financing

Navigating the financial landscape as a small or medium-sized enterprise (SME) can be challenging, especially when growth is hampered by limited access to capital. For businesses in Singapore, the choice between Accounts Receivable (AR) Financing vs Accounts Payable (AP) Financing can be pivotal in determining the most suitable avenue for obtaining the necessary funds. These financing options serve as lifelines for SMEs, addressing the gap between incurring expenses and receiving payments from customers. While both methods offer advantages, it’s crucial to delve into their distinctions to make an informed decision when seeking a business loan.

Accounts Receivable Financing primarily revolves around leveraging the value of outstanding invoices. In this arrangement, businesses can secure immediate cash flow by selling their unpaid invoices to a financial institution or lender at a discount. This allows SMEs to access funds that are tied up in accounts receivable, providing much-needed liquidity to support operations, invest in growth, or address other financial obligations.

On the other hand, what defines Accounts Payable Financing is that it involves optimising the management of outgoing payments. This method enables businesses to extend their payment timelines with suppliers, effectively granting them additional time to settle their payables. By strategically managing the timing of payments, SMEs can free up capital that would have otherwise been earmarked for immediate disbursement. This newfound flexibility in managing payables can be a valuable tool for enhancing cash flow and supporting various aspects of business development.

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What is Accounts Receivable (AR) Financing?

Accounts Receivable Financing is a form of asset-based financing in which a business borrows money against outstanding invoices. It enables companies to unlock cash tied up in unpaid customer invoices easily and quickly, allowing them to gain access to working capital without having to wait for their customers to pay.

So how does it work?

Accounts Receivable Financing works whereby a financier provides a business loan against the value of an invoice, meaning businesses can receive a cash advance almost immediately. This allows businesses to leverage their accounts receivable as collateral for the loan and quickly free up the cash tied up in those receivables. As a result, they get the working capital they need to keep their operations running smoothly and to invest in growth opportunities. AR Financing is a great option for businesses struggling to manage cash flow, as it helps them bridge the gap between when they need to pay their suppliers and when they receive payment from their customers.

What is Accounts Payable (AP) Financing?

Accounts Payable (AP) Financing is different from Accounts Receivable (AR) Financing as it is a type of debt financing in which a business borrows money against the invoices it has not paid to its supplier. In other words, it is a type of invoice financing that allows businesses to access working capital quickly without having to make any payment upfront on its own.
AP Financing works by providing businesses with a cash advance against their supplier invoices. This way, businesses can use their accounts payable as a source of short-term financing, enabling them to meet their immediate financial needs and fund business growth.

With that said, what are the elements SMEs are missing out when it comes to AP Financing or Accounts Receivable Financing for that matter?.

3 Key Differences Between Funding Societies’ AR Financing and AP Financing

Listed below are key differences between accounts payable vs accounts receivable financing, elements that will be discussed are, quantum, coverage and eligibility criteria. So let’s jump right into these highlights:

1. Quantum

Funding Societies provides a valuable financial solution for SMEs in Singapore, offering AR Financing with a generous maximum limit of S$1 million and a transparent fee structure free from hidden charges. This is particularly advantageous for businesses seeking swift access to substantial capital. In contrast, AP Financing caters to the needs of SMEs with more modest cash flows, providing smaller quantum loans of up to S$500,000. This makes it an ideal choice for businesses requiring short-term financing to manage upfront payments efficiently.

2. Coverage

Funding Societies offers AR Financing that covers up to 80% of the value of an invoice, allowing SMEs to access capital quickly without having to wait for customers to pay their bills. This form of financing is ideal for businesses that have a steady stream of customer invoices but need access to working capital in order to cover operational costs or invest in new opportunities.

With AP Financing, your business is able to borrow against the amount you owe suppliers for goods and services purchased on credit terms. Unlike AR Financing, AP Financing provides 100% coverage of the supplier’s invoice amount, allowing SMEs greater flexibility when it comes to accessing funds. This form of financing is ideal for businesses with a high volume of supplier payments, or when no credit terms are offered by your suppliers. Making full payment upfront also puts you in a better position to negotiate for discounts from your suppliers.

3. Eligibility Criteria

To make the loan application process easier, let’s take a look at the SME eligibility criteria for each product.
AR Financing is available to:

All Singapore registered businesses with at least 30% local shareholding and have been in operation for at least six months.
100% foreign-owned companies who prefer notified arrangements.

On the other hand, AP Financing from Funding Societies is available to all Singapore registered businesses, and Pte Ltd Co. or LLP Incorporated businesses with an operating history of more than 12 months are eligible to apply. However, applicants cannot be more than 30 days past due in current or previous loans or facilities with Funding Societies.

AR Financing and AP Financing are two popular financing options for SME working capital loans. At Funding Societies, we understand that each business has different needs and requirements when it comes to financing solutions. If you need more information on which option is better for your business needs, check out our website below.

Disclaimer: The information provided to you in this blog post is intended only for general information purposes only and does not constitute legal or other professional advice on any subject matter. The materials and the information provided are not intended to be and do not constitute an advertisement or solicitation. In no event will Funding Societies be liable to any party for any direct, indirect, incidental, special, consequential or punitive damages for use of such information by you or any unauthorised third party.

Accounts Payable Financing is fulfilled by FS Capital Pte Ltd (in partnership with Enterprise Singapore), whereas Accounts Receivable Financing is fulfilled either by Funding Societies Pte Ltd, or FS Capital Pte Ltd (in partnership with Enterprise Singapore), depending on the customer profile.