Supply Chain Finance or Invoice Factoring?

Supply chain finance programs can be a way to get cash fast. Before you go down this path, be sure to research other financing options and understand what’s best for your business. Invoice financing, although somewhat different, adopts a similar structure in cash advances. If you’re confused about your overall options, work with a finance professional to better understand what’s best for your specific business situation.

Should you participate in a supply chain finance program?

Every day I hear about another company that offers a supply chain finance (SCF) program or prepayment option for their suppliers. Most SCF programs are offered by large companies with thousands of suppliers, such as Amazon, Walmart, Coca-Cola, Warner Bros., Nordstrom, and Bell. Some of these companies are using their own cash to fund the programs, while others have partnered with banks or hedge funds to fund advance payments to vendors.

PricewaterhouseCoopers’ 2018/2019 SCF Barometer found that 55% of companies surveyed participate in supply chain finance programs. Additionally, 41% of respondents who do not participate in supply chain finance programs said they would consider it.

As someone who has spent the past decade working directly with small and medium-sized businesses, providing them with working capital through accounts receivable financing, I have to ask myself, “Supply chain financing will replace- Does it factor invoices? »

What is Supply Chain Finance?

Supply chain finance, although a bit complex, is a useful tool for small businesses. It gives small businesses the ability to extend supplier payment terms without any impact on their credit scores and without suppliers losing money.

In this scenario, the vendor may receive prepayment on unpaid invoices from a third-party funder. When the payment date arrives for the small business a few weeks later, the business makes the payment and the money goes to the funder or supplier, depending on who holds the account at that time.

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To be clear, this procurement system isn’t a debt or a loan – it’s a tool that small businesses and suppliers can use to free up capital through a third-party funder. Although third-party financing institutions may charge a fee for each transaction, this is not an asset-based lending program. This is the key difference between supply chain finance and invoice factoring.

What is invoice factoring?

Unlike supply chain finance, invoice factoring is a type of small business loan. Invoice factoring is a tool businesses can use to get immediate cash on unpaid invoices. They work with a third-party lender who will redeem outstanding accounts receivable. Although it may sound similar to supply chain finance, it is an asset-based lending program in which a company’s accounts receivable serve as collateral.

Invoice factoring can be a quick and easy way to get cash up front. Keep in mind that factoring companies charge a fee for each transaction and can purchase accounts receivable at discounted rates.

Supply Chain Finance vs Factoring: What’s the Difference?

Unlike factoring, where a supplier sells its receivables at a discount to a third party (a factor) for prepayment, supply chain finance is a buyer-initiated financing solution where the buyer s undertake to pay an invoice in advance for a discount. The advantage for the buyer is a discount on the invoice price.

The benefit to the supplier is prepayment, usually at a discounted rate lower than factoring. This is a new electronic approach to the old 2/10 net 30 payment term, but the buyer initiates the prepayment request through the use of technology.

Advantages and disadvantages of invoice factoring

Advantages

  • You get quick access to capital.
  • Accounts Receivable are responsible for final payment.

The inconvenients

  • Your accounts receivable are treated as collateral.
  • You may not receive the full amount of an overdue account.

Advantages and Disadvantages of Supply Chain Finance

Advantages

  • It is not an asset-based lending program.
  • It’s a quick way to free up some cash.

The inconvenients

  • The third party company may take a small fee.

Will supply chain finance replace invoice factoring?

No, I do not think so. Why?

Supply chain finance does not change the imbalanced relationship between large buyers and small suppliers. Factoring has been around for hundreds of years because when a small supplier sells to a larger buyer, the larger buyer determines when they will pay their invoice, often regardless of the agreed payment terms.

Supply chain finance does not change this relationship. It is initiated and controlled by the buyer. The buyer decides which suppliers can participate, how quickly they will pay and what discount they will require. Some buyers may not have the money, the technology or the interest to offer it to all of their suppliers, only offering it to their biggest suppliers. Others may offer it today only to withdraw it tomorrow without notice due to changes in their cash position or priorities. The power belongs to the buyer and the supplier remains at his mercy for payment.

Invoice factoring gives you more control.

Factoring changes this dynamic, as it is initiated and controlled by the supplier. With factoring, the supplier determines which invoices they will factor and when based on their cash flow needs. They are under total control. They know the cost up front and can factor that into their pricing.

Technology is making invoice factoring paperless.

One of the disadvantages of factoring is that it can be laborious, with copies of invoices having to be submitted and verified by the factor. The increasing use of technologies such as electronic invoicing and payment makes factoring easier and more streamlined. Online vendor portals allow a postman to easily view and confirm invoices.

Take control of your cash flow.

Not too long ago, one of my factoring clients received an email from a client inviting him to participate in a prepayment program. All they had to do was press a button and a discounted payment would be sent to them within seven days compared to the standard 30 days. My Canadian client sells to both the Canadian and US divisions of this large retailer as well as dozens of other clients. The prepayment offer was only available on US invoices from this one customer.

So, if one of your customers invites you to participate in their supply chain finance program, you should ask yourself, “Has anything really changed? Yes, you can get paid early for a discount, but you might not. What guarantee do you have that it will be available on your next invoice, and on the one after that?

With factoring, you are in control. You determine which invoices to factor and when to meet your ever-changing cash flow needs. You deal with a single factor for all your invoices instead of working with a different program, process and platform for each customer.

Wondering what happened when my client was invited to participate in the supply chain finance program? They passed. This offered them little benefit, as it only applied to a very small portion of their accounts receivable and did not give them the control to manage their cash as needed.

Matt D’Angelo contributed to this article.

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