Invoice Factoring vs Supply Chain Financing

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: