How Does Invoice Financing Drive Singapore’s Growth?
As with the global economy, small & medium-sized enterprises (SMEs) are the cornerstone of Asia’s economic development. The Asian Development Bank (ADB) reports that SMEs account for over 90% of all companies in the country and employ more than 60% of its workers. A September 2015 World Bank (WB) study showed that the majority of formal employment in emerging markets are small and medium-sized companies, which also generate four out of every five new positions.
However, it is no secret that the development of these leading organizations is severely stifled by a lack of funding. The WB study noted that over 50% of SMEs are being kept back by inadequate funding.
A Worsening Problem
The situation was first compounded by the fall-out from the global financial crisis of 2008 and is still at risk of further deterioration due to continuing geopolitical instability.
Add regulatory changes and tighter regulation to the mix – for example, the implementation of the Basel III criteria for capital adequacy – and banks are gradually tightening their belts and concentrating on big business, their current, reliable consumer base.
An SME in Singapore usually wants to have over S$30m in sales revenue and have to be in business for at least three years for it to qualify for a loan or working capital from the bank, unless it falls under the subsidized scheme like Singapore’s microloan program (MLP), which can give as much as S$100,000 for at least up to four years.
Therefore, in this era of fintech and economic transformation, providing solutions that can fund more SMEs rapidly has never been more important, allowing them access to the resources they live or die by.
Stepping Into a Widening Gap
It is where alternative sources of finance step in. Invoice financing and peer-to-peer (P2P) networks provide an online marketplace for SMEs to sell invoices to approved or institutional investors on a short-term basis. Such invoices come from local businesses that sell them to their face value at a discount. Investors know a profit when the debtor pays for the invoice.
Invoice financing is on the rise, as it helps businesses to boost their cash flow by using their sales invoices as assets to raise money, rather than waiting for payment or risking their credit rating via other channels.
A business would traditionally sell its invoices at a discounted rate via a brokerage, but technology now enables funders to have this investment strategy available to a broader market – and advanced algorithms ensure they can easily deliver fractional investment.
Invoice financing – and especially the discounting of invoices – has a range of benefits over other potential funding methods. This allows companies more flexibility and the opportunity to collect emergency capital, easily access capital, and sell as many invoices as they wish. A more flexible tool than invoice factoring, discounting lets companies to trade their invoices separately. In factoring, companies trade their entire receivables book.
Companies may now access working capital from banks that are becoming increasingly scarce, despite their increasingly stringent measures. For instance, our own invoice financing platform works with small and medium-sized businesses with sales revenues of more than S$100,000, who have been in operation for more than a year and who can access funding with stable accounts receivables (ARs).
The capital can even be periodically rolled over to be used on a continuous basis without brand new approvals. It is like a revolving credit line, helping SMEs develop and remain in business while providing an environment where they could flourish and develop.
Rewarding and Protecting Investors
The model of the invoice financing is different from that of the P2P lenders because it includes the selling of the asset; it sells the invoice to the creditor who then has recourse to the debtor if it is not paid. This provides more stability relative to the funding of loans.
Default rates on the loan platforms are typically much higher than the financing of invoices, and the costs are also higher for the lender.
Well-run invoice financing platforms determine not just the creditworthiness and financial ability of the debtor but also that of the seller, because if the debtor fails to settle the invoice within 30 days of the scheduled due date, the seller must be able to repurchase the invoice. Apart from analyzing quantitative indicators, our own framework looks at more intangible aspects, such as the context of the relationship between the seller and the debtor. All the elements are then put into a scoring system that produces the invoice grade.
Investors profit from annualized returns of 11%-25% depending on the level of risk of the invoice over the 90-day investment period. The higher the risk, the higher the returns. Transparency is at the core of the model, with investors controlling the process on the platform itself and monitoring output and return on each invoice in which they invest.
Looking to the Future
The concept of the marketplace invoice financing platform will expand rapidly, further disrupting the banking sector. This is because the wide market void that banks can not fill is now being filled with a lower-cost, quicker, and simpler financing alternative – and investors want the higher returns they can make on P2P platforms.
It also refers – and is appropriate – to all industries and geographies as there are ambitious small and medium-sized companies around the world that want to grow and achieve success. They all need cash to fund their ambition.