Knowledge Centre
Learn More About Invoice Financing
In simple terms, trade finance is when an exporter requires an importer to prepay for goods shipped. The importer wants to reduce risk by asking the exporter to document that the goods have been sent as proof. The importer’s bank assists by providing a letter of credit to the exporter (or the exporter’s bank), providing payment upon presenting certain documents, such as a bill of lading. The exporter’s bank may make a loan to the exporter based on the export contract.
One of the challenges that small and medium enterprises (SMEs) face is the cash flow crunch, especially during a pandemic or an economic crisis. With trade financing, SMEs can overcome the challenge. Trade financing provides the buyer with a revolving credit line instrument to pay for the goods, and for the seller, it secures the payment of the goods exported.
On paper, the importer would improve their inventory and revenue turnover cycle with trade financing. Without trade financing credit facilities from banks, an SME importer might have to wait till customers pay them before having enough funds to procure the next shipment from suppliers.
Trade finance providers include funding institutions, banks and alternative finance providers, who provide capital for the physical buying and selling of goods.
There are different ways for lending to be structured. It depends on the size of the borrowing company and the funder’s source of capital, and the restrictions placed on them. This will usually dictate the price that they will lend at and how they advance funds. In addition, it may also impact what security they take, the length of time credit assessment will take, and the tenor they will offer funds.
The source of capital and structure of a lender is critical as this dictates many elements within the facility.
A letter of Credit (LC) is a commitment provided by the bank based on specific terms and conditions in the form of a letter agreed upon between the bank, buyer, and seller. It is widely used as a funding tool that promises to pay the specified amount on a specific due date to the seller on behalf of the buyer.
It is a commonly used financing technique by banks in the local market within the country. It is financing with or without recourse to vendors or dealer’s in advance based on the Bill of Exchange.
Invoice factoring helps businesses to fund cash flow by selling their invoices to a third party (a factor or factoring company) at a discount. Invoice factoring can be provided by independent finance providers such as Incomlend or by banks.
Factoring companies can unlock funds tied up in unpaid invoices for businesses to receive funds without waiting for customers to pay, for a fee. This makes cash flow management easier for the companies that use factoring. Most factoring providers will manage credit control, meaning that the business no longer needs to chase customers for invoice payment, reducing administrative time.
Many factoring facilities include credit insurance and these are called non-recourse facilities, which means if the company’s customers default or go into insolvency, the funds tied up in unpaid invoices can be recovered. There is no credit insurance in recourse facilities, so the business will have to pay back any funds previously advanced against relevant invoices in the event of a default.
Incomlend provides invoice financing on an intuitive and easy-to-use online platform. The platform offers fast and flexible working capital solutions, enabling exporters and importers to manage their working capital needs.
Through the online platform, accredited and institutional investors can finance directly to companies worldwide. Investors will earn steady and stable returns while helping the exporters and importers access working capital to accelerate their business growth.
Investors can take a hands-on approach to invoice investing on our cross-border platform, directly on the platform with capital held on Trustee secured escrow accounts in Singapore. Allocate capital to individual invoices or to groups of invoices that meet the investors’ preferences. They can build their unique invoice trading investment strategy.
Most SMEs are not able to get financing from traditional banks. It’s estimated that banks reject a high percentage of loan applications that they receive. It’s fortunate that alternative lenders have emerged to meet the needs of SMEs today.
In summary, an alternative lender is a broad description of any business lender that isn’t associated with a traditional bank. These lenders are often considered online lenders or fintech companies because they use technology to deliver financial products or services. Online lenders are fast, adaptable and breaking barriers in the SME financing world.
Most times, banks practise strict standards of what businesses they finance to minimise their risk. Hence, they tend to favour more prominent companies with a proven track record. Alternative lenders provide financing products for SMEs with limited credit history, especially when the SMEs could not meet the stringent bank criteria.
Alternative lending has become a significant force globally, and according to research company Statista, it is projected to reach USD200 billion by 2025.
Our export/import business should be based in one of the geographies we cover, the goods traded should not fall under the hazardous or perishable category and there should be an existing relationship between the trade partners (seller/buyer).