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.