Introduction
When it comes to funding, small to medium-sized enterprises (SMEs) are struggling to access funds and critically, most are struggling with accessing the right type of funding. Knowing what type of funding to access is important because it means the capital will be used correctly. Most SME founders apply for traditional bank loans and government grants; however, there are alternative types of funding, such as invoice financing.
What is Invoice Financing?
Invoice financing allows businesses to borrow money against the amounts due from customers or suppliers, providing them with immediate capital. Invoice financing comes in two forms: factoring and discounting. Factoring means selling your invoices to a factor who then collects payments directly from customers. Discounting lets you retain control of your debtor’s book, with the financier advancing a percentage of the invoice value.
With a growing number of SMEs in South Africa, the rise of alternative financing methods such as invoice financing is important. Alternative financing can broaden access to funding and ensure SMEs get their funds quickly.
Let’s take a look at the different elements of invoice financing and how it can benefit SMEs.
Different Types of Invoice Financing
As mentioned above, there are two types of invoice financing in South Africa: invoice discounting and invoice factoring. Within these two categories are different subtypes with further differences. One of these is selective receivables financing, which can affect the percentage of the sum of each invoice that is immediately provided, and the fees and interest charged. The main differences between invoice discounting and factoring are who collects the unpaid money.
Main Features
Invoice financing is most suitable for small businesses operating as wholesalers and distributors. Additionally, SMEs that have secured tenders can also benefit from invoice financing, as it is a type of working capital loan – both are unsecured loans.
Some of the benefits of invoice financing include:
- No dilution of equity, and the founder retains control of their business
- Fast approval, as most invoice lenders are fintech companies
- Funds are typically disbursed within 48-72 hours
- Can help SMEs improve cash flow health
- Loan terms are reasonable, typically between 3-24 months
- Improves business liquidity through accelerated cash conversion
Pricing
Invoice loans are funded based on the invoice. Certain funders will set a minimum for the amount they fund. Most of the requirements aren’t focused on pricing, but rather on your business’s ability to pay back the loan.
Criteria may include:
- Being a registered business with an operational period of at least 12 months
- Have a minimum annual revenue
- Be actively generating monthly revenue
Upon application, they may ask you to supply:
- Yours and your shareholder(s) IDs. If your company does not have a/or shareholder(s), you need to submit your ID document only.
- Your company registration documents.
- Valid bank statements.
Pay-back rates will be determined by the insitutions where you borrow from.
Buyer's Guide
There are several invoice financing options available on the market. Here are a few tips to help you choose the right one for your business.
Reputation and Experience:
Research the lender’s history and read customer reviews to ensure they have a proven track record and a good reputation in the industry. It also helps to access reviews about these lenders on reputable websites.
Industry Specialisation:
Some lenders specialise in certain sectors, so a firm that understands your industry may be a better fit. Aside from this, you might also only be able to apply with specific lenders due to the type of industries they support.
Customer Service:
Evaluate the quality of support and responsiveness offered by the financing company. Quick, helpful service is priceless.
Funding Speed:
One of the primary advantages of invoice financing is quick access to cash, so evaluate how quickly you can expect to receive funds.
Contract Terms:
Carefully review the contract for any hidden clauses or unfavourable conditions, such as a long notice period for terminating the service. You have to understand by when repayment needs to happen and what your costs will be. Pay attention to the rates of repayment, too.
Cash Flow Needs:
Determine how urgently you need access to the capital tied up in outstanding invoices. This will indicate how much you need to apply for.
