SMEs can ease cash flow with P2P factoring
By Benjamin Cher January 6, 2016
- ‘Factoring’ is a little-known financial practice that banks offer
- With Invoice Interchange, SMEs can choose to sell select invoices
CASH flow is often the biggest worry for any company, and small and medium enterprises (SMEs) seem to bear the burden when servicing big customers.
Long payment periods which can stretch for up to 60 days from delivery, and the reluctance of banks to extend them credit, can lead to a perilous dance between black and red.
InvoiceInterchange cofounder and chief executive officer Brian Teng, an accountant by profession, has seen many SME owners facing this struggle during his audits.
“They were concerned about the working capital and the survival of the company – funding the day-to-day operations or taking on a big order from a customer all require cash flow,” he told Digital News Asia (DNA) in Singapore.
But there is a financial product that can ease these cash flow worries. Called ‘factoring,’ it is a practice in which companies can sell their accounts receivables or invoices to a third party at a discount, for immediate cash.
“My cofounder Nalinee Chinowuthichai had experience with her family’s traditional factoring business, and we saw synergies and opportunities to help SMEs in a new, flexible online way, giving them better access to financing,” said Teng.
Thus InvoiceInterchange was spawned as a peer-to-peer invoice trading platform for SMEs to sell, and investors to buy, invoices.
Factoring remains relatively unknown amongst SME owners, according to Teng, and spreading the word has proven to be a challenge.
Many business owners are too reticent to admit they would need such funding, worried that bankers and financers would turn them away when they do face an actual financial crunch. Instead, the first thing they think of when trying to raise cash is to get a loan, he lamented.
Invoice Interchange wants to create greater awareness that “there is a more flexible and targeted way for you to solve your cash flow needs via invoice financing, which InvoiceInterchange can provide.
“We provide the flexibility to decide the actual invoice, the amount and duration, as well specifically target the cash flow gap they are experiencing,” Teng said.
SMEs which finance themselves using this method achieve better control in managing their cash flow and financing costs, he claimed.
“The good thing is that once they understand the concept, they realise that this could suit them better if they are looking for flexibility,” he added.
More flexible than banks
While banks have been providing factoring for years, they lack the flexibility that SMEs need and which InvoiceInterchange can provide, Teng claimed.
“If businesses want to do factoring with a bank, they have to do ‘whole turnover financing,’ which means that you won’t be allowed to sell the odd invoice or two, but have to sell all the invoices with a customer,” he said.
There are minimum charges as well, even if the business does not utilise or draw down on the facility, as well as other fees on top of the financing charges.
“But we are fully transparent – customers know exactly how much they are going to pay before they get funding, and it’s a pay-as-you-go system,” Teng said.
“We are much faster at disbursing the funds than the banks – our sign-up process takes two days, and businesses can get their funds within 24 hours,” he claimed.
InvoiceInterchange does not have a fixed pricing structure either, evaluating each invoice on a case-by-case basis, according to Teng.
The more an SME conducts transactions on the platform, the greater opportunity for the financing cost for it to come down too, he promised.
“That’s a big advantage – what we are seeing with our current customers, is that those which have done a few rounds of selling invoices and paying off, are getting more interest from investors.
“They [the SMEs] have built that track record, confidence and relationship, and our investors are fighting for their invoices – therefore they can command lower fees,” he added.
In terms of revenue model, InvoiceInterchange takes a cut of the value of each invoice financed via the platform, according Teng.
“That’s on the SME side – on the investor side, we also take a transaction fee from the profits they make,” he said, declining to disclose the percentages.
Cheques and balances
The financial services technology (fintech) startup verifies both investors and SMEs coming on board its platform, with Singapore’s strict financial regulations leaving no room for error, according to Teng.
“We always need to know who they are, we do a KYC (know your customer) on the investors to ensure we know their identity, residence, status, and whether they are Singaporean, permanent residents or foreigners,” he said.
“We also do AML (anti-money-laundering) checks to ensure they are not on a blacklist, which is important in Singapore because there is a concern here about source of funds and whether it is legitimate.
“On the SME side, we request documentation from them – we look at the identities of the directors and their financials.
“We also look at bank statements and activities going on in the business – importantly, we also check to see if there is an established relationship between the SME and the end-customer whose invoice is being sold,” he added.
InvoiceInterchange also looks at sales contracts to affirm the proven relationship between the SME and end-customer.
In the pipeline
When it comes to InvoiceInterchange’s technology roadmap, the fintech startup will be looking to improve the user interface and user experience for both investors and clients.
It also intends to build in automated reporting so that clients can analyse the data, the options, and invoices on the platform, according to Teng.
“We also want to add in multiple currencies to facilitate trade between different currencies,” he said.
In terms of market expansion, InvoiceInterchange is interested in other South-East Asian markets too, especially Indonesia and Thailand.
Funding-wise, at a recent demo day, the company announced that it was already in the term-sheet stage of negotiations with an investor.
It is looking to raise a seed round of S$400,000 (US$281,000), according to Teng.
“It will be mostly used to accelerate growth, and we will be investing in sales and marketing, credit and IT,” he said.
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