How do you think businesses make a decision to take up financing?
Hi there everyone!
As a P2P investor, it is common for us to wonder about the reasons driving a SME business to take up financing through a P2P platform. Or even further upstream - what makes them consider it in the first place?
Based on feedback shared by our SMEs, I wrote this piece as a guide to point SMEs towards a suitable product for their needs:
- Why do SMEs take business loans, and how can they benefit from them?
- Why do SMEs take on invoice financing, and how can they benefit from them?
- How does Funding Societies’ financing solutions benefit SMEs?
- What financing solutions are suitable for my business model?
If you’ve deliberated / thought about these questions, or if you are a business owner, or know of a business owner who may fit the bill, hope the article helps! ☝
Can you think of any other reasons why businesses would take on business loans or invoice financing / financing in general?
Do share, would be happy to discuss them and learn from you 🙂
htjr last edited by
@josephkoh Thanks for writing the insightful blogpost. Thought this part was quite interesting as I could imagine some of these small business being "bullied" by the bigger boys when it comes to payment collections.
Will certainly keep this in mind and refer businesses should I come across any facing such issues.
How to identify SMEs that would benefit from Invoice Financing?
- SMEs that have a large proportion of their revenues derived from B2B, especially if the SMEs serve relatively large organizations such as MNCs since the SMEs tend to provide credit terms to gain business and cater to the finance processes of large organizations;
- SMEs in industries that are facing macroeconomic challenges which resulted in delayed payments along the entire value chain such as Oil & Gas, Construction and Manufacturing.
arigatomon last edited by
@josephkoh it's an informative article. Thanks for sharing!
arigatomon last edited by
@josephkoh Referring to this line "Funding Societies will advance up to 80% of the invoice value in cash to the SME.", why is it only 80%? Is there a regulated quota of sorts?
@arigatomon Thanks for your question. It is not a regulatory restriction for us to advance up to 80% of the invoice value. It is sort of an industry benchmark and it is generally due to the rationale shared below:
While we want to aid the company's cash flow, we would avoid giving an advance of the profits to the company. It's not to say that the profit margin is always 20%, but it is just a relative benchmark as not many companies have net margins much higher than 20%. Thus, the money advanced by FS for invoices submitted will help to cover costs of importing / production / provision of service. The company can take its profit once the invoice is settled by the debtor (ie the remaining 20% excluding interest and fees)
There may also be disputes, warranties or credit notes on the invoices. For example, in a batch of good delivered, there may be 5% faulty or failed QC on the buyers' end and they typically will get a credit note which will be offset from future invoices. By not giving the full advance on the invoice value, there is a 20% buffer against such refunds or credit notes.
The financing advanced to companies may still differ from 80%, depending on other risk factors such as the strength of debtors, whether if trade credit insurance was applicable, payment trend and records.