Difference between Supply Chain Finance and Invoice Factoring

Md. Meher Ullah • October 14, 2022 • 9 mins read

Infrastructure improvements, operational competition initiatives, economic turbulence, longer timeframes for payments. A supplier may need to be paid in advance for the goods or services it provides for a myriad of reasons, but they all contribute to the same overriding goal: improved cash flow. In reality, this necessity has heightened concerns due to the dangers and chokepoints in today's global supply chains.

Two of the most popular methods suppliers are paid early are invoice factoring and supply chain finance. But what are the benefits and drawbacks of these two strategies? Which strategy ought to be applied when? Performs one better than the other?

  1. What is Supply Chain Financing and how does it differ?
  2. Benefits of Supply Chain Finance
  3. Benefits of Factoring
  4. Importance of Supply Chain Financing

What is Supply Chain Financing and how does it differ?

In order to help buyers and suppliers manage their invoice payment terms, preserve liquidity, and keep cash flowing freely through a supply chain, financial institutions offer supply chain finance, commonly referred to as "reverse factoring," which refers to shared online accounts.

When it comes to supply chain finance, buyers frequently take the initiative to set up funding arrangements. This is especially true when customers are bigger and have better credit ratings than suppliers, who can be start-ups or small enterprises in developing nations. When suppliers and buyers have a long history of doing business together, it usually develops into a commercial relationship.

On the other hand, factoring and invoice discounting, from the standpoint of the borrower, look up the supply chain to a company's customers and utilize these debts as collateral. On the other side, supply chain finance looks all the way down the supply chain to the suppliers.

Supply chain finance is a type of working capital financing that provides liquidity in a manner akin to an overdraft, despite attempts by certain supply chain finance providers to pass it off as something else. The primary distinction is that money is exclusively used to pay suppliers

There is certainly no benefit for a lender to take security over a supplier invoice from the standpoint of security. The supplier is unlikely to step in and help if the borrower doesn't pay the debt. Instead, supply chain finance lenders like ILending find solace in the borrower's overall strength. a claim that is frequently protected by credit insurance.

Benefits of Supply Chain Finance

1. Stability. Suppliers are more likely to be able to withstand financial pressure that would make it difficult for them to provide on-time, high-quality deliveries if invoices are paid early.

2. Cost-saving. Another benefit is the flexible control of working capital. In terms of when and how many of their invoices they want funded, suppliers are completely in charge. In order to better manage cash flow, the buyer may also profit from the possibility of extending the payment terms. This is how supply chain finance benefits both suppliers and customers.

3. Cheap credit. Small and micro-sized enterprises are more likely to have their loan requests denied by banks and other financial institutions. But because supply chain finance is not considered a loan, it can be a practical way to get short-term borrowing that is both reasonably priced and low-risk.

4. Speed. Because supply chain finance is not a loan, it can usually be arranged more quickly than alternative financial options.

Benefits of Factoring

Cash flow is quickly boosted through factoring. If a company lacks working capital, this could be quite helpful. Factoring has similar benefits to supply chain financing, including:

1. Cost-saving. There are numerous lenders who offer factoring services at a competitive rate, so It can be a reasonably priced method to outsource your sales ledger while giving you more time to run your company.

2. Factors can help you negotiate better terms with your suppliers and also provide you with vital information on the credit standing of your clients.

3. When preparing for business expansion, factors can be a great strategic and financial resource. If you choose non-recourse factoring, you will be shielded from bad debts.

Importance of Supply Chain Financing

As we’ve mentioned above, even though it is the small and micro-sized enterprises that ensure the business market’s liveliness and growth, it is often difficult for them to gain access to loans from banks and other financial institutions.

This is where SCF has the potential to assist the growth of millions of entrepreneurs who are restrained by restrictions such as lack of fixed collaterals and limited offerings by those institutions.

With SCF, many SMEs and Micro SMEs will also have the chance to draw loans for their business’s expansion and potentially grow larger than they expected, all while not having to worry about the payment terms to their suppliers.

October 17, 2022 • 9 mins read
October 17, 2022 • 9 mins read