Which One Manages Cash Flow Better?
Is invoice factoring a better fit for your company than supply chain finance? What you should know about both financing options is provided below.
Programs for supply chain financing may be able to help you receive money rapidly. Make careful to look into alternative funding options and determine what is best for your company before taking this route. Despite being considerably different, invoice finance uses a similar mechanism for cash advances. If you're uncertain about your alternatives overall, consult a finance expert to learn more about what will work best for your company's particular circumstances.
Should you participate in a program for supply chain financing?
I learn about a new business every day that provides a supply chain finance (SCF) program or an early-pay option for its suppliers. The majority of SCF programs are provided by big businesses like Amazon, Walmart, Coca-Cola, Warner Bros., Nordstrom, and Bell, which have thousands of suppliers. Some of these companies support the initiatives with their own money, while others have joined with banks or hedge funds to pay suppliers in advance.
According to PricewaterhouseCoopers' 2018/2019 SCF Barometer, supply chain financing schemes are used by 55% of the companies questioned. In addition, 41% of respondents who are not currently enrolled in supply chain finance schemes stated they were thinking about it.
Will supply chain finance replace invoice factoring? I have to raise this question since I have spent the last ten years working directly with small and midsize businesses to provide them with working capital through accounts receivable financing.
What is finance for supply chains?
Despite being rather complicated, supply chain financing is a helpful tool for small businesses. It enables small businesses to postpone payments to suppliers without affecting their credit scores or causing the suppliers to suffer financial loss.
In this case, a third-party financier may offer the supplier advance payment on the unpaid debts. A few weeks later, when the small business's payment due date arrives, it completes the payment and sends the funds to the funder or supplier, depending on which party currently owns the account.
To be clear, this supply system is not a loan or debt; rather, it is a vehicle that suppliers and small businesses can use to raise money from a third party. This is not an asset-based loan scheme, although third-party funding institutions may charge a fee for each transaction. The primary distinction between invoice factoring and supply chain financing is this.
What is factoring in invoices?
Invoice factoring is not a form of supply chain financing; rather, it is a small business loan. Businesses can use invoice factoring as a strategy to get cash on unpaid bills right away. They collaborate with a different lender who will purchase unpaid accounts receivable. Although it may sound similar to supply chain finance, this program is an asset-based loan where the accounts receivable of a company are used as security.
A quick and simple approach to obtain upfront cash is through invoice factoring. Remember that factoring providers may charge fees for each transaction and may offer discounts on the purchase of accounts receivable.
What distinguishes factoring from supply chain financing?
Supply chain finance is a type of financing where the buyer agrees to pay an invoice early in exchange for a discount, as opposed to factoring, where a supplier sells its receivables at a discount to a third party (a factor) in exchange for early payment. The buyer gains from a price reduction from the invoice amount.
Early payment, typically at a discounted rate lower than factoring, is advantageous to the supplier. It's a new technological interpretation of the traditional 2/10 net 30 payment term, however this time, technology is used by the buyer to request early payment.
Will invoice factoring be replaced by supply chain financing?
I don't think so, in fact. Why?
The uneven relationship between large buyers and smaller suppliers is unaffected by supply chain financing. Since a bigger buyer typically choose when to pay an invoice they receive from a smaller supplier, frequently in spite of the payment conditions they agreed to, factoring has been around for hundreds of years.
The finance of the supply chain has no impact on this relationship. The buyer starts it and controls it. The purchaser controls which suppliers are invited to participate, how quickly payments are made, and what kind of discount is desired. Some buyers might not have the resources, know-how, or desire to make it available to all of their suppliers, instead making it available to only the biggest suppliers. Others might present it today, then abruptly withdraw it the following day due to shifting priorities or their cash flow situation. The buyer still has the upper hand, and the provider is still at their mercy about payment.
You have more control when you factor in invoices.
This dynamic is altered by factoring since the provider initiates and controls it. Based on their requirements for cash flow, the supplier chooses which bills to factor and when. They have total command. They can adjust their prices accordingly because they are aware of the cost in advance.
Due to technology, invoice factoring is now paperless.
Factoring has the potential to be labor-intensive because copies of the invoices must be presented to and validated by the factor. Factoring has become simpler and more efficient as a result of the growing use of technology, including e-invoicing and e-payment. It is simple for a factor to check and confirm invoices thanks to online vendor portals.
Keep your cash flow under control.
A customer recently sent an email to one of my factoring clients urging them to take part in an early payment program. All they had to do was push a button, and instead of the usual 30-day period, a discounted payment would be paid to them in just seven days. This large retailer's Canadian and American divisions, in addition to dozens of other clients, are both buyers from my Canadian client. The early payment discount applied exclusively to this one customer's U.S. invoices.
Therefore, if one of your clients asks you to take part in their supply chain finance program, you should reflect on whether anything has actually changed. Getting paid sooner for a discount is possible, but it's not guaranteed. What assurance do you have that it will be included in your upcoming invoice and any subsequent ones?
You are in charge with factoring. To accommodate your fluctuating cash flow needs, you choose which invoices to factor and when. Instead of using a different platform, method, or application to engage with each customer individually, you deal with a single component for all of your bills.
Do you have any questions regarding the invitation my client received to the supply chain finance program? They succeeded. As it only pertained to a very tiny fraction of their accounts receivables and did not give them the control they needed to manage their cash flow, it was of little use to them.