Choosing the Right Solution: Invoice Financing vs Term Loan

Whenever a sizable portion of a company’s monthly revenue goes towards paying for operating costs and other projects, cash flow management becomes a major concern for small and medium-sized businesses (SMEs) in Singapore and other areas worldwide. Smaller companies have less time to make it before they run out of money, unlike larger ones. Especially for newer, smaller businesses, the consequences of a late payment or expensive purchase can be devastating. Fortunately, SMEs can take precautions against these threats. MSME Blog offers finance, technology, and policy expertise to help small and medium businesses succeed and grow in the global economy. Term loans and invoice financing are two common choices to handle the threats better. This article will offer a detailed understanding of invoice financing vs term loans to help you select the ideal one for your company.

Learn What is Invoice Financing & Term Loan

Invoice finance is short-term financing that allows businesses to turn unpaid invoices into immediate cash. SME loans in Singapore benefit various industries, including construction, wholesale trade, and manufacturing sectors. It can help bridge the funding gap caused by customer payment delays. Invoice finance is a low-risk option for small and medium-sized businesses since it allows them to convert revenue into working capital without adding to their total liabilities.

Invoice financing can help businesses avoid bad debt by borrowing against the money owed or the money they have already spent. However, it may not be suitable for significant expenses such as new equipment or commercial real estate. Term loans offer more favorable terms and suit businesses seeking funds for essential expenses that invoice financing may not cover. They have more stringent conditions for share ownership, annual revenue, and loan purposes.

Invoice Financing vs Term Loan: What to Consider?

While picking between term loans and invoice financing, it is essential to consider three things: the purpose of the funds, the loan’s interest rate, and the company’s unique financial situation. Invoice finance may be a good choice for companies needing short-term liquidity to fill temporary cash flow shortfalls. On the contrary hand, a term loan may be more practical if you need to cover more substantial expenditures, such as new machinery.

Finance-wise, interest rates are a significant factor. Invoice finance allows firms to pay interest only on the money they spend. However, invoice financing requires an upfront cost of 0.25 percent of the invoice value as interest and handling fees on the financing amount, whereas the Effective Interest Rate (EIR) for term loans is established at the outset.

Invoice Financing vs Term Loans: Understanding the Pros & Cons

Think about the specifics of your company, including the invoices you plan to finance and the consistency of your clientele. Instead of looking at invoice finance as a line of credit, consider it an advance on future revenue. Invoice finance can be helpful if you need to make an urgent purchase of equipment or services crucial to the smooth running of your organization. In contrast, on the other hand, small and medium-sized enterprises (SMEs) that require a longer time to pay off large, game-changing expenses may find term loans more suitable.

Summing It Up

No single financing option is ideal for all small and medium-sized enterprises. Considering these three criteria, you can pick the best financing option for your company. Discuss your options with a financial counselor if you’re still confused about how to finance your project. Our MSME Blog provides you with the latest and most relevant information to help you succeed by finding funding sources and understanding relevant procedures.

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