Accounts Receivable Financing: Myths

Invoice / Accounts Receivable financing has been around for centuries.  It became a part of doing business in England as early as the 1400s.  Like anything else, invoice factoring has evolved over the years and has become one of the most effective financial instruments for the modern day SMEs.  The perception of invoice financing has also changed positively over the last few years, recording a global growth of 15% from 2013-2014.

Singapore had a massive jump in factoring volume, growing from 10 billion euro in 2013 to 37.8 billion euro in 2014.  That is a roaring growth of 280%.

The main reasons that contributed to this growth were the long credit terms and the banking sector’s lending curbs.

SMEs who wish to supply to large customers are often bound by their long payment terms.  This causes cash flow constraint for SMEs.  Hence, invoice financing has become a necessity rather than a choice for many businesses.  Large companies do value suppliers that have appropriate financial facilities in place to smooth cash flow and fund their growth.

However, there are many business owners who are not aware of such facilities or have been misguided by incorrect information about account receivables financing.  Some of the myths are:

Myth 1. Business that uses Invoice / Accounts Receivable financing is one that is failing and/or on the verge of going out of business.

Invoice financing companies are not in the business of providing finance to failing companies.  In contrast, invoice financing companies such as InvoiceInterchange, only extend finance to companies that are in a state of expansion and have customers that have good credit payment history.  It is a win-win situation where SMEs that finance their invoice receive cash early whilst their customers can pay according to their preferred credit terms.

Myth 2. Businesses that use Invoice / Accounts Receivable financing do not have control over their account receivables / invoices

On the contrary customers who utilise invoice financing are actually the ones who manage its accounts receivable financing well.  These are the companies that keep a sharp focus on their cash requirements and take the appropriate actions to ensure their cash flow needs are always met.

Myth 3. If the end customers find out that their supplier is using invoice financing, it may jeopardise future orders.

As mentioned at the start, invoice financing has become a very popular and acceptable way to raise working capital.  Majority of large companies are now well aware of this financial service and its many benefits.

Besides, invoice financing/discounting will help SMEs to better devote their time and resources into sales and customer service, being freed from having to concern itself on cash flow issues.

Myth 4. My customers will be harassed by the Invoice Financing company

This is totally not true.  Invoice discounting provides a confidential facility where, in normal circumstances, your end customer will not be contacted or notified at all.  This allows SMEs to continue to strengthen their relationship with the suppliers with invoice factoring.

Myth 5. I should only use Invoice / Accounts Receivable financing for short term finance only

The duration to participate in invoice financing is totally flexible and it is solely decided by the SMEs themselves.  If they need an all year round cash injection, that can be catered as well.  The key characteristic here is the flexibility; only sell invoices to factoring companies when the need arises.

Myth 6. Invoice / Accounts Receivable financing Financing is really expensive

The cost of invoice financing is extremely competitive against other financial products.  One of the main benefit here is to utilise the company’s balance sheet to generate working capital, rather than taking on loans thus increasing the company’s liabilities.

Invoice Financing is now universally accepted as a vital financial instrument for SMEs.  Government and central banks all around the world have been showing huge support, recognising its role as an alternative channel for SMEs to tap into for their working capital.   In October 2013 the British Government launched the British Business Bank to supply funding and guarantees to providers of finance for SMEs. The institution generated £660 million of new lending and investments in 2013 and is projected to double in 2014 and again in 2015.”  A portion of the budget has already gone into a British Invoice Trading platform to help support local SMEs.

Source

• Factors Chain International (FCI), link
• Department for Business Innovation & Skills, HM Treasury, link