Supply Chain Finance or Invoice Factoring: Which is Better for Managing Cash Flow?

Business.com / Business Solutions / Last Modified: August 31, 2017
Photo credit: ptnphoto/Shutterstock

You may not have heard of supply chain finance, but it is a growing funding option for small and medium-size businesses. Learn more about the differences between supply chain finance and invoice financing.

Every day I hear about another company offering a supply chain finance (SCF) program or early-pay option for their suppliers. Most SCF programs are offered by very large corporations with thousands of suppliers, including Amazon, Walmart, Coca Cola, Warner Brothers, Nordstrom’s and Bell. Some of these corporations are using their own cash to fund their programs, while others have partnered with banks or hedge funds to fund early payments to suppliers.

A 2016 study conducted by Global Business Intelligence found that 20 percent of companies surveyed had used some sort of supply chain finance in the past. Further, 25 percent reported they expected to finance at least 10 percent of their receivables through an early-pay finance program within five years. As someone who has spent the past decade working directly with small and medium-sized businesses, providing them with working capital through accounts receivable financing, I have to ask myself, "Will supply chain finance replace invoice factoring?"

Supply chain financing vs. factoring: what's the difference? 

Unlike factoring, where a supplier sells its receivables at a discount to a third party (a factor) for early payment, supply chain finance is a financing solution initiated by the buyer where the buyer agrees to pay an invoice early for a discount. The benefit to the buyer is they get a discount off the invoice price.

The benefit to the supplier is they get early payment, usually at a discounted rate less than factoring. It is a new electronic take on the old 2%/10, net 30 payment term, but where the buyer initiates the request for early payment through the use of technology.

Will supply chain financing replace invoice factoring?

No, I do not believe so. Why?

Supply chain financing does not change the unbalanced relationship that exists between big buyers and smaller suppliers. Factoring has been around for hundreds of years, because when a smaller supplier sells to a bigger buyer, it is the bigger buyer who determines when they will pay their invoice, often regardless of the payment terms they agreed to.

 

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Supply chain financing does not change this relationship. It is initiated and controlled by the buyer. The buyer decides which suppliers can participate, how quickly they will pay and what discount they will demand. Some buyers may not have the money, technology or the interest in offering it to all their suppliers, and may offer it only to their biggest suppliers. Others may offer it today only to take it away tomorrow without notice because of changes in their cash flow position or priorities. Power remains with the buyer, and the supplier remains at their mercy for payment.

Factoring gives you more control

Factoring changes this dynamic. It is supplier-initiated and controlled. When factoring, the supplier determines which invoices they will factor and when based on their cash flow needs. They are in complete control. They know the cost ahead of time and can factor it into their pricing.

Technology is making factoring paperless

One drawback of factoring is it could be labor-intensive, with copies of invoices needing to be submitted to, and verified by, the factor. The increasing use of technology such as einvoicing and epayment makes factoring easier, and more streamlined. Online vendor portals make it easy for a factor to view and confirm invoices.   

Be in control of your cash flow

Not long ago, one of my factoring clients received an email from a customer inviting them to participate in an early payment program. All they had to do was press a button and a discounted payment would be sent to them within seven days versus the standard 30-day term. My Canadian client sells to both Canadian and U.S. divisions of this major retailer as well to as dozens of other customers. The early payment offer was available on the U.S. invoices only of this one customer.

So if the opportunity arises where one of your customers invites you to participate in their supply chain finance program, you should ask yourself, "Has anything really changed?" Yes, you may get paid sooner for a discount, but you may not. What guarantee do you have that it will be available on your next invoice and on the one after that? With factoring, you are in control. You determine which invoices you will factor and when to meet your ever-changing cash flow needs. You deal with one factor for all of your invoices versus working with a different program, process and platform for each customer.  

Are you wondering what happened with my client invited to participate in the supply chain finance program? They passed. It offered little benefit to them as it only applied to a very small portion of their accounts receivables and did not provide them with the control to manage their cash flow as needed.

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