Clear Finance
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.
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.
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
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:
Differences | Invoice Factoring | Supply Chain Finance |
---|---|---|
Cost involved | Since the risk is higher, the financers usually charge a high fee for providing advance payments against invoice | Since the invoice belongs to large corporates, the risk involved is low and consequently lower financing charges |
Purpose | The 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 growth | The sole purpose of supply chain financing is to fund the organisation’s working capital |
Onus to collect payment | The onus to collect payment from the customer is on the business owner | The financier is responsible to collecting the payment from the customers |
Control | The financier doesn’t have any control over the supplier’s sales ledger | The financier gains control of the supplier’s sales ledger |
Customer’s creditworthiness | Checking the customer’s creditworthiness is the supplier’s responsibility | Supply chain financing companies will check the creditworthiness of the customers before agreeing to buy the invoices from the supplier |
Confidentiality | As the buyer isn’t aware of the financier’s involvement, the supplier can have a great level of confidentiality | Since the financier approaches the customer for collecting the payment, it's impossible to maintain confidentiality |
Suitability | Invoice factoring is used more by big and medium-sized businesses | Supply chain financing can be used by both small and medium-sized businesses with reliable customers |
Type of transaction | In invoice factoring, businesses keep their invoices as collateral with the financing company to obtain a loan | In supply chain financing, businesses basically sell their invoices to the financing company to obtain the funds |
Customer’s credit rating | The loan amount doesn’t depend on the customer’s credibility | The financing company funds the supplier depending on its customer’s financial credibility |