Buyer: “Hi Sir, we need to double our orders from the last time.  And we need it urgently!

You: “huh!!!”

 “I don’t have sufficient working capital to fulfil the order.  All my cash is tied-up in accounts receivable!”

Many Singapore SMEs are thrilled to experience this kind of growth, but what do they do now when the continuously growing orders start to become a financial nightmare.

Cash flow has always been the most challenging aspect of financial management for SMEs all round the world.  Maintaining adequate working capital and managing growing demand is not a simple task. The problem has been made more acute in recent years as banks who dominate majority of the business lending market are increasingly closing up their doors to growing SMEs due to Basel III regulatory requirements. With Basel III, banks will have to hold more cash in reserve and therefore unable to lend at sufficient levels. What then are the other options available for SMEs to finance business growth?

In recent years there has been tremendous growth in the alternative finance industry who are filling the funding gap through innovative online platforms. These new financing models like peer-to-peer lending, crowdfunding, invoice discounting and invoice trading provide a more efficient, customised and flexible working capital solution to businesses.

Whilst peer–to-peer lending and crowdfunding have been around for some time, invoice trading has only just recently been made available to SMEs in Singapore.

Online invoice trading companies offer businesses a new alternative to traditional bank products such as factoring, invoice discounting and receivables financing.  It allows businesses to selectively sell single unpaid invoices (accounts receivable) to a pool of private investors via an online invoice trading platform. It provides businesses fast access to much needed working capital and unlock funds not otherwise seen for up to 120 days.

How invoice trading works

SMEs sell their outstanding invoices online in an auction. Investors will compete to advance the SME the most money for the invoice at the lowest cost.  Once the auction closes, cash is advanced to the SME within 48 hours.  When the invoice is repaid by the debtor (SME’s customer) the proceeds are disbursed to investors and the SME according to the terms of the auction.

Benefits

  1. Short and simple set up – most platforms allow online applications
  2. Full control & flexibility – sell invoices as and when needed only, choosing specific invoices and debtors to raise funding against
  3. Confidential – in most cases customers (debtors) will not be notified of the invoice being sold, allowing the business to retain the relationship with its customer.
Constraints
  1. Usually only able to sell commercial invoices issued against reputable customers
  2. The company’s receivables must be free of debenture or charge, otherwise lender’s permission must be obtained
  3. The costs and amount of funding may vary from one auction to another.

Invoice trading and is already helping many SMEs around the world fill the gap created by the withdrawal of traditional lenders.  It is a fantastic method of addressing cash flow issues and to raise working capital to fund business growth in a far more flexible, efficient and cost effective way.

Nalinee Chinowuthichai is the co-founder of InvoiceInterchange, Singapore’s invoice trading platform, where SMEs can flexibly manage their cash flow by selling invoices to a network of investors who compete to provide cash advances.

Find out more on Invoice Trading