Invoice financing explained in one line: a lender pays you part of an unpaid invoice now, and you pay it back when your customer pays. It turns a bill that is waiting into cash today. Small suppliers often use it because big buyers pay late. This guide shows how it works, what it costs and when a loan may suit you better.
How invoice financing works
You sell goods and send an invoice. The terms say the buyer pays in 60 or 90 days. You still need cash for wages, rent and stock in the meantime.
With invoice financing, a bank or finance firm advances you a share of that invoice right away. Banks describe this as paying the seller before the buyer's money arrives. The advance is usually 70 to 90 percent of the invoice value.
When the buyer pays, the lender takes back the advance plus its fees. You get the rest. At one large Singapore bank, repayment is a single lump sum on the due date.
Banks aim this product at small firms that have a lot of money tied up in unpaid invoices. The buyers are often larger, established firms that expect generous payment terms.
Sources: OCBC, "Sales invoice financing for SMEs" (published 1 January 2021), https://www.ocbc.com/business-banking/articles/sales-invoice-financing-for-smes.
Financing versus factoring
People use these two terms loosely. The Asian Development Bank notes that in many countries the local legal term factoring covers both factoring and reverse factoring. So always ask a provider exactly what it means.
A common split is this. In plain invoice financing, you keep the customer relationship and the lender stays in the background. In factoring, the lender buys or manages the invoice and often collects the payment from your buyer. Your customer then knows a third party is involved.
Factoring can cost more in total if you also pay for the collection work. Ask whether your buyer will be told, and whether that fits how you want to treat your customers.
Sources: Asian Development Bank, Brief 250 on supply chain finance in Central Asia and the Caucasus (June 2023), https://www.adb.org/sites/default/files/publication/891871/adb-brief-250-supply-chain-finance-central-asia.pdf.
What it costs
Cost has a few parts. There is usually a discount charge, which is interest on the cash you take early. Some providers add a service fee. Some charge an upfront fee when your application succeeds.
One large bank in Singapore states an upfront fee of 0.25 percent of the invoice value, or S$100 if that is higher. Other fees depend on the lender and on how risky your buyer looks.
Here is a simple way to compare offers. Take all the fees, add them up, and divide by the cash you actually receive. Then work out how many days the money is out. A small fee for a long wait can cost more than it looks.
Check one more thing: who carries the risk. If your buyer does not pay on time, you may face penalties or have to cover the full amount yourself. Ask if the deal is with recourse before you sign.
Sources: OCBC, "Sales invoice financing for SMEs" (published 1 January 2021), https://www.ocbc.com/business-banking/articles/sales-invoice-financing-for-smes.
A simple example
Say you send an invoice for S$10,000 with 60 day terms. A lender advances 80 percent, which is S$8,000. You use it to buy stock and pay staff.
Your buyer pays on day 60. The lender takes back the S$8,000 and its fees, and sends you the remaining S$2,000 less any charges. These figures are an illustration only, not a quote from any lender.
The cash came 60 days early. The price was the fees. Whether that is a good trade depends on your margin and on what the cash lets you do.
When a loan may be better
Invoice financing fits when your problem is slow-paying buyers and you have good invoices to use. It does not fit when you need money for a fixed purpose, such as a machine or a new shop. It also does not help if your buyers are weak or unreliable.
A working capital or trade loan may then be a better fit. In Singapore, Enterprise Singapore runs a scheme in which it shares loan default risk with participating banks. Its list of loan types includes a working capital loan and a trade loan. The scheme works through participating financial institutions.
Ask each lender three things. What does it cost in total? Do you carry the risk if your buyer does not pay? Will your buyer be told? Then pick the option that you can repay even if a customer pays late.
Beyond bank products, the Asian Development Bank runs a program that backs partner banks so they can finance small suppliers. It describes finance raised against a strong credit rating as having a lower implied cost of funding. Ask your bank whether such a program applies to you.
Sources: Enterprise Singapore, "Enterprise Financing Scheme", https://www.enterprisesg.gov.sg/financial-support/enterprise-financing-scheme; Asian Development Bank, Trade and Supply Chain Finance Program, https://www.adb.org/scfp.
Sources: OCBC, https://www.ocbc.com/business-banking/articles/sales-invoice-financing-for-smes; Asian Development Bank, https://www.adb.org/scfp; Enterprise Singapore, https://www.enterprisesg.gov.sg/financial-support/enterprise-financing-scheme.