Invoice Factoring vs Supply Chain Financing

Updated on :  

08 min read.

Every business needs adequate capital to sustain its operations. Without sufficient cash flow supply, a business will struggle to manage its working capital requirement for its day-to-day operations. Fortunately, several financing alternatives are available to businesses, like supply chain finance and invoice factoring. This article will talk more about invoice factoring vs supply chain financing.

Understanding Invoice Factoring

Invoice factoring is a process where an organisation gets a loan by keeping its invoices as collateral or selling its invoices at a discount to a third-party financing company. Such discount is financing company’s profit in the transaction. Invoice factoring is also known as bill factoring. The seller organisation/vendor gets a percentage of the invoiced amount billed to its client from the financing company. By keeping their invoices as collateral with the financing company, organisations can get access to cash quickly improve their working capital cycle and cash flow. 

The financing company, upon maturity of the aforementioned receivables, collects the full amount from the buyer. Invoice factoring is generally used by businesses that can’t or don’t want to wait for their customers to clear their dues.

Supply Chain Financing Explained

A faster and easier way to ensure adequate working capital is Supply Chain Financing. Established businesses and large organisations are highly likely to honour the invoices from their suppliers. That means a supplier to such businesses could receive 100% of the value of its invoices from a lender in advance, minus a small fee. Once a buyer approves the invoice for payment, the supplier can reach out to lenders for advance payment, as the risk of non-payment is considerably low.

Breaking down supply chain finance

  • A supplier issues an invoice to its buyer.
  • The buyer approves such an invoice.
  • The supplier then approaches a lender to advance such an invoice.
  • The lender gets confirmation from the buyer that the said invoice has been approved for payment.
  • The lender advances the funds to the supplier after deducting a small fee.
  • Once the payment is due, the buyer pays the lender.

Invoice Factoring vs Supply Chain Financing

Both supply chain finance and invoice factoring helps a business resolve its problems of cash flow crunch, sluggish working capital cycle, etc. However, there are some noteworthy differences between invoice factoring and supply chain finance listed below:

DifferencesInvoice FactoringSupply Chain Finance
Cost involvedSince the risk is higher, the financers usually charge a high fee for providing advance payments against invoiceSince the invoice belongs to large corporates, the risk involved is low and consequently lower financing charges
PurposeThe fund received via invoice factoring could be used for several purposes like hiring temporary staff during a busy period, buying more raw materials, and investing in business growthThe sole purpose of supply chain financing is to fund the organisation’s working capital
Onus to collect paymentThe onus to collect payment from the customer is on the business ownerThe financier is responsible to collecting the payment from the customers
ControlThe financier doesn’t have any control over the supplier’s sales ledgerThe financier gains control of the supplier’s sales ledger
Customer’s creditworthinessChecking the customer’s creditworthiness is the supplier’s responsibilitySupply chain financing companies will check the creditworthiness of the customers before agreeing to buy the invoices from the supplier
ConfidentialityAs the buyer isn’t aware of the financier’s involvement, the supplier can have a great level of confidentialitySince the financier approaches the customer for collecting the payment, it's impossible to maintain confidentiality
SuitabilityInvoice factoring is used more by big and medium-sized businessesSupply chain financing can be used by both small and medium-sized businesses with reliable customers
Type of transactionIn invoice factoring, businesses keep their invoices as collateral with the financing company to obtain a loanIn supply chain financing, businesses basically sell their invoices to the financing company to obtain the funds
Customer’s credit ratingThe loan amount doesn’t depend on the customer’s credibilityThe financing company funds the supplier depending on its customer’s financial credibility
Hide →