Invoice financing is also commonly known as factoring. It is the oldest form of financing and can be a useful alternative and complement to traditional bank business loan. However, invoice financing might not be suitable for all SMEs but could be considered if the following conditions are present:
1. SME is selling to large MNCs, Government related bodies or big well know enterprises.
2. Credit terms for trade sales is considerably long e.g. 30-120 days
3. SME facing cash flow crunch due to the long credit terms extended to customers
Another critical condition to consider is whether if the financier requires invoice financing to be on 'notified' or 'non-notified' basis. Invoice financing/factoring on notified basis which is commonly required by financiers require the debtor (in this case the customer of the SME) to be notified of the financing arrangement and payment of debt when due, usually credits directly to financier. The financier in return will advance up to 90% of the invoice value to the SME. Cost of invoice financing could be lower than unsecured business loan as the lender has a collateral in the form of the unpaid invoice. Financing costs differs between banks and financial institutions. Including interest and handling fee, costs could range between 0.6% to 3% per month. https://smeloan.sg/blog/factoring-how-it-helps-small-businesses