Invoice Financing, Invoice Factoring, Purchase Order Financing, Overdraft Facility
Trade facilities serve as solutions to companies engaged in international and domestic trade transactions.
Trade financing can provide for working capital financing on underlying trade transactions, via supplier invoices OR trade receivables.
Trade facilities are financing products related to trade finance. Trade finance is the process of financing various activities associated with commerce and international trade, such as invoice financing, letters of credit, invoice factoring, and purchase order (import) financing.
Credit and repayment terms in trade finance are generally short-term, between 30 – 120 days on average. This financing acts as a safety net to protect the interests of buyers and sellers in an international marketplace.
Simply put, trade facilities serve to reconcile the divergent needs of an exporter and importer.
With the assurance of having sufficient funding to start on new projects, and sufficient cash flows to sustain the business while awaiting payments from clients, you will now have the confidence to embark on bigger projects and focus on growing the business!
Invoice financing is a form of asset based financing that allow companies to get access to financing based on account receivables. There are two ways to finance invoices:
- Spot factoring; where invoices can be sold to a factoring company in exchange for immediate funds that can be used to improve working capital and pay for general company expenses.
- Using account receivables to secure a revolving line of credit, where the credit limit is based on a myriad of factors, such as the financial strength of the company and/or the financial strength of the proposed debtors.
Factoring is relatively easier to obtain than unsecured loans because companies are selling an asset rather than getting an unsecured loan. A key requirement to qualify is to have invoices to credit-worthy commercial clients, such as government agencies or big multi-national companies that are financially strong and reputable. As a result, factoring is as an alternative option to small businesses that do not have substantial assets or a proper credit history.
Purchase Order Financing
Purchase order financing is a short-term commercial financing facility that provides immediate funds to pay suppliers upfront for verified purchase orders. Generally, two essential situations that businesses try to avoid are, draining cash reserves, and/or declining an order because of cash flow problems in making payments to suppliers. Purchase order financing allows companies to take on large orders, and provides for flexibility in increasing or decreasing loan quantums quickly to meet needs. If general business volume drops, there are no long-term commitments, and companies are able to pause in utilizing the facility.
Who uses it?
PO financing is typically for growing businesses that want to take on the unusual larger orders. While PO financing is a commonly used source of financing for a myriad of business types, the more common types of businesses that usually qualify include:
How does it work?
Your company receives a large order from a customer. Your supplier needs an upfront payment, but your customer invoice will not be paid for 30-90 days after shipment is received. This creates a gap in your cash flow. Without enough money, you risk losing the order and customer confidence.
With a verified PO, a purchase order financing facility will allow a bank or financial institution to pay the suppliers upfront, directly via a letter of credit or cash. Your business then fulfills the order, and you pay the bank/financial institution back after 120 days.
An overdraft facility is a short-term (usually up to 12 months) standby credit facility which allows companies to issue cheques or withdraw cash from their current account up to the overdraft limit approved. It is usually renewable on a yearly basis, and repayable on demand by the bank at any time.
An overdraft limit is the maximum amount that a company can overdraw from the current account. Interest is only payable on the amount overdrawn, calculated on the daily balance overdrawn, and debited from the account monthly. Any unpaid amounts of interest are added to the overdrawn amount in the following month. Interest rates on an overdraft account is usually charged at a percentage over the bank’s prime lending rate, for example, Prime + 3% per annum. The facility acts as a revolving credit facility where, whatever amount repaid into the overdraft account can be withdrawn again as long as the total outstanding amount is within the overdraft limit granted.
What types of overdraft facilities are available?
An overdraft facility can be obtained on a secured or unsecured basis.
A secured overdraft requires for a company to pledge an asset to the bank as security. The asset pledged could be deposits in the bank, property or shares. In an event where the bank stops the secured overdraft facility and the company is unable to repay the outstanding debt, the bank reserves the right to recover the outstanding amount by selling the pledged security.
An unsecured overdraft facility does NOT require for any kind of pledged asset as security. In Singapore, banks are generally able grant unsecured overdraft limits of up to 25% of a company’s yearly revenue, subjected to credit scrutiny of the company’s financial health and credit exposure. There are no minimum monthly repayments for an overdraft facility as long as the amount utilised is within the approved limit.