Invoice Financing: Myths and Legends

For SMEs, choosing the right invoicing provider is a decision that needs careful and particular consideration, writes Morgan Terigi, CEO and co-founder of Singapore-based Incomlend

Photo of an empty invoice being printed out of a card reader on a surface with an orange background

As global businesses face a post-pandemic landscape, I feel many SMEs are currently seeking ways to improve their corporate operations rather than worry about their fiscal problems. I believe invoice financing has and will continue to provide the necessary solutions. Invoice trading allows exporters to benefit from early payment for supplied goods and services, and importers can therefore extend payment terms and minimise the risk of supply chain disruption. In addition to this, investors can accelerate the return on capital.

Debunking any myths surrounding invoice financing can provide businesses with a far greater understanding of its value and importance.

Invoice financing misconceptions

Some myths involving invoice financing have the potential to be harmful. The most common ones are that all invoice financing companies are the same, that it’s only for businesses in financial trouble, and that it’s too expensive. Others include that invoice financing can potentially damage customer relationships, it’s a funding solution solely for start-ups, and that companies need to use assets as security. 

If we look at how successfully SMEs dealt with the myriad of financial and other challenges posed by COVID-19, we can perhaps safely file all of the above under the category of ‘myths’. 

Surviving COVID-19

According to The World Bank, SMEs account for more than half of global employment. By utilising suitable trade finance frameworks such as invoice financing, some reduced business risks during COVID-19. The flexibility to receive the majority of payments once items had been shipped and the final, smaller portion, once the buyer had paid outstanding bills in full, was greeted with open arms by many SMEs. Not only did they survive, but they also thrived positively. This would seem to be supported by an increase in SME figures during this period. The global number of SMEs totalled 332.99 million worldwide in 2021. In 2019 this figure was 328.5 million.

Further, in 2021, SMEs in the UK with 10 to 49 employees were the most likely to have made a profit. This figure was 60 per cent compared to an average of 52 per cent.

How can SMEs find the right invoicing provider?

Every business owner is conscious that there can be a prolonged and sometimes significant gap between cash flow and revenue in their operation. Such a company usually has a substantial amount of its assets locked up in receivables. Excessively long payment periods may cause a business to face working capital challenges if its receivables account for the larger proportion of its current assets. 

Invoice financing is advantageous to SMEs as it provides access to quick cash flow to accelerate the working capital cycle. This method also provides lengthier payment terms and the face value of the financed invoice grows with the firm. The most critical factors that SMEs should consider when searching for the most suitable invoice finance provider for their particular business are:

  • Choose a recognised, trustworthy and experienced firm with previous expertise in a particular industry, market, and geographical area
  • For buyers, evaluate those firms offering the possibility of extending terms of payment
  • For sellers, look for a non-recourse financing solution

I firmly believe that companies who are seen to exercise due diligence and compliance will be rewarded with maximum security by choosing a well-recognised and trusted firm over one that is just ‘finding its feet’. It is vitally important to remember that companies following a non-recourse policy help SMEs to remain stress-free if a buyer subsequently becomes the bad debt.

The future of invoice financing

Factoring, also known as debtor financing, is the exercise of buying an invoice or debt from an organisation at a reduced rate. This results in a profit to the buyer upon settlement. Growth in this area has been immense. The worldwide factoring market was valued at US$3,467bn in 2021. This figure is expected to achieve a value of US$4,877bn by the year 2027. This represents a CAGR (Compound Annual Growth Rate) of 6.1 per cent for the period 2022 to 2027.

SMEs are continually looking for other capital sources to help their operation run more smoothly and efficiently. A diversity of suppliers raises several issues, such as regulatory concerns. In fact, the UK’s invoice finance industry is not currently regulated by the FCA (Financial Conduct Authority). SMEs who structure their funding as flexibly as possible offer themselves a competitive advantage in terms of rapid adaptation. 

Invoice finance should be adaptive, scalable as well as responsive to the requirements of individual enterprises. These factors will determine the direction the sector will take as the world continues to recover from the effects of COVID-19. 

About the Author: Morgan Terigi is Co-Founder and CEO of Incomlend. A serial entrepreneur, Morgan boasts an extensive background in retail and trade. An engineer by training, Morgan graduated from HEC Paris Business School with an MBA in 1999. In addition to being CEO of Incomlend, Morgan is also Chairman of the Board of Directors of Incomlend Capital, a Singapore-based investment portfolio company within the Incomlend Group. Incomlend Capital provides managed fund services to institutional and accredited investors. 

About Incomlend:

Incomlend is a global invoice financing marketplace for businesses and private capital. Founded in 2016, the Singapore-based company has processed more than 6,000 transactions and provides invoice finance services in over 50 countries worldwide. As one of the first alternative cross-border trade finance platforms globally, Incomlend enables companies to finance their export invoices by selling them to institutional investors at a discount.