Supply chain finance programs can be a way to get cash quickly. Before you pursue this path, make sure you research other financing options and understand what's best for your business. Invoice financing, while somewhat different, takes a similar structure in cash advancements. If you're confused about your overall options, work with a finance professional to better understand what's best for your business's specific situation.
\r\nEvery 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 large corporations with thousands of suppliers, such as Amazon, Walmart, Coca-Cola, Warner Bros., Nordstrom and Bell. Some of these corporations use their own cash to fund the programs, while others have partnered with banks or hedge funds to fund early payments to suppliers.
\r\nThe 2018/2019 SCF Barometer from PricewaterhouseCoopers found that 55% of surveyed companies are participating in supply chain financing programs. Further, 41% of respondents that are not participating supply chain financing programs said they were considering it.
\r\nAs someone who has spent the past decade working directly with small and midsize businesses, providing them with working capital through accounts receivable financing, I have to ask myself, \"Will supply chain finance replace invoice factoring?\"
\r\nSupply chain financing, while a little complex, is a useful small business tool. It gives small businesses the opportunity to extend payment dates to suppliers without any impact to their credit scores and without the suppliers losing money.
\r\nIn this scenario, the supplier can receive advanced payment on the outstanding invoices from a third-party funder. When the payment date comes for the small business a few weeks later, the business fulfills the payment and the money goes to the funder or supplier, depending on which holds the account at that time.
\r\n\r\n
Editor's note: Need a factoring service for your business? Fill out the below questionnaire to have our vendor partners contact you with free information.
\r\n
To be clear, this supply system is not a debt or a loan – it's a tool small businesses and suppliers can use to free up capital via third-party funder. While third-party funding institutions may charge a fee for each transaction, this is not an asset-based lending program. This is the main difference between supply chain financing and invoice factoring.
\r\nUnlike supply chain financing, invoice factoring is a type of small business loan. Invoice factoring is a tool businesses can use to get money on outstanding invoices immediately. They work with a third-party lender that will buy outstanding accounts receivable. While it may sound similar to supply chain financing, this is an asset-based lending program where a company's accounts receivable acts as collateral.
\r\nInvoice factoring can be a quick, easy way to get cash upfront. Keep in mind that factoring companies will charge fees for each transaction and may buy accounts receivable at discounted rates.
\r\nUnlike 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 a discount off the invoice price.
\r\nThe benefit to the supplier is early payment, usually at a discounted rate less than factoring. It's a new electronic take on the old 2/10 net 30 payment term, but the buyer initiates the request for early payment through the use of technology.
\r\nNo, I don't believe so. Why?
\r\nSupply chain financing does not change the unbalanced relationship 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.
\r\nSupply 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 interest to offer it to all their suppliers, offering 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. The power remains with the buyer, and the supplier remains at their mercy for payment.
\r\nFactoring changes this dynamic, because it is initiated and controlled by the supplier. With 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.
\r\nOne 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 e-invoicing and e-payment makes factoring easier and more streamlined. Online vendor portals make it easy for a factor to view and confirm invoices.
\r\nNot 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 as dozens of other customers. The early payment offer was available on the U.S. invoices only of this one customer.
\r\nSo, if 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?
\r\nWith 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 instead of working with a different program, process and platform for each customer.
\r\nAre 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 give them the control to manage their cash flow as needed.
\r\nMatt D'Angelo contributed to the writing in this article.
\n","docType":"article","guid":"articles_91c12b09dcdda4de9913009a75b920c8","lastModified":"2020-05-14T14:52:00.000Z","published":"2017-08-28T15:08:00.000Z","structuredData":null,"subtitle":"Is supply chain finance right for your business, or would invoice factoring suit it better? Here's what you need to know about both types of financing.","template":"v1","title":"Supply Chain Finance or Invoice Factoring: Which Is Better for Managing Cash Flow?","type":"article","author":{"avatar":null,"bio":"Anne MacRae has been in the factoring, trade financing and asset based lending industry since 2006 and is the Vice President of Business Development with Express Business Funding, a leading? factoring and ABL company. Prior to EBF, she held senior sales roles with Trade Finance Solutions and the Interface Financial Group. \r\n\r\nHaving owned her own business in the past, Anne brings a deep understanding of the challenges entrepreneurs face in obtaining financing and has used this experience to help hundreds of clients secure funding to grow their businesses. \r\n\r\nAnne sits on the board of directors of the International Factoring Association, Canada Chapter, and is a regular contributor on panels and in publications on alternative lending.","name":"Anne MacRae","image":null,"slug":null,"social":{"facebook":"","linkedin":"","twitter":null,"website":"https://www.expressbusinessfunding.ca"},"status":"enabled","title":null,"type":"New BDC Member","user":{"imagePath":"https://staging.business.com/images/","profile":{"company":"Express Business Funding","jobTitle":"Vice President, Business Development","website":"https://www.expressbusinessfunding.ca"}}},"breadcrumbs":null,"channels":{"primary":{"name":"Finance","slug":"finance"},"sub":{"name":"Financial Solutions","slug":"financial-solutions"}},"meta":{"robots":"index, follow","description":"Here's how to choose between supply chain financing and invoice factoring for managing your business's cash flow.","title":"Supply Chain Finance or Invoice Factoring? - business.com"},"parsedContent":{"toc":[{"id":"should-you-take-part-in-a-supply-chain-finance-program","title":"Should you take part in a supply chain finance program?"},{"id":"what-is-supply-chain-financing","title":"What is supply chain financing?"},{"id":"what-is-invoice-factoring","title":"What is invoice factoring?"},{"id":"supply-chain-financing-vs-factoring-whats-the-difference","title":"Supply chain financing vs. factoring: What's the difference? "},{"id":"pros-and-cons-of-invoice-factoring","title":"Pros and cons of invoice factoring"},{"id":"pros-and-cons-of-supply-chain-financing","title":"Pros and cons of supply chain financing"},{"id":"will-supply-chain-financing-replace-invoice-factoring","title":"Will supply chain financing replace invoice factoring?"},{"id":"be-in-control-of-your-cash-flow","title":"Be in control of your cash flow."}],"json":[{"component":"p","children":["Supply chain finance programs can be a way to get cash quickly. Before you pursue this path, make sure you research other financing options and understand what's best for your business. Invoice financing, while somewhat different, takes a similar structure in cash advancements. If you're confused about your overall options, work with a finance professional to better understand what's best for your business's specific situation."]},{"component":"h2","props":{"id":"should-you-take-part-in-a-supply-chain-finance-program"},"children":["Should you take part in a supply chain finance program?"]},{"component":"p","children":["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 large corporations with thousands of suppliers, such as Amazon, Walmart, Coca-Cola, Warner Bros., Nordstrom and Bell. Some of these corporations use their own cash to fund the programs, while others have partnered with banks or hedge funds to fund early payments to suppliers."]},{"component":"p","children":["The ",{"component":"a","props":{"href":"https://www.pwc.com/vn/en/deals/assets/scf-barometer-2018-2019.pdf","target":"_blank","rel":"nofollow"},"children":["2018/2019 SCF Barometer from PricewaterhouseCoopers"]}," found that 55% of surveyed companies are participating in supply chain financing programs. Further, 41% of respondents that are not participating supply chain financing programs said they were considering it. "]},{"component":"p","children":["As someone who has spent the past decade working directly with small and midsize businesses, providing them with working capital through ",{"component":"a","props":{"href":"https://www.expressbusinessfunding.ca/","target":"_blank","rel":"nofollow"},"children":["accounts receivable financing"]},", I have to ask myself, \"Will supply chain finance replace invoice factoring?\""]},{"component":"h2","props":{"id":"what-is-supply-chain-financing"},"children":["What is supply chain financing?"]},{"component":"p","children":[{"component":"a","props":{"href":"https://primerevenue.com/what-is-supply-chain-finance/","target":"_blank","rel":"nofollow"},"children":["Supply chain financing"]},", while a little complex, is a useful small business tool. It gives small businesses the opportunity to extend payment dates to suppliers without any impact to their credit scores and without the suppliers losing money."]},{"component":"p","children":["In this scenario, the supplier can receive advanced payment on the outstanding invoices from a third-party funder. When the payment date comes for the small business a few weeks later, the business fulfills the payment and the money goes to the funder or supplier, depending on which holds the account at that time."]},{"component":"p","children":[" "]},{"component":"p","children":[{"component":"span","props":{"data-sheets-value":"{\"1\":2,\"2\":\"Editor's note: Need a [category name] for your business? Fill out the below questionnaire to have our vendor partners contact you with free information.\\n\"}","data-sheets-userformat":"{\"2\":513,\"3\":{\"1\":0},\"12\":0}"},"children":[{"component":"strong","children":["Editor's note: Need a factoring service for your business? Fill out the below questionnaire to have our vendor partners contact you with free information."]},{"component":"br"}]}]},{"component":"RfqWidget","props":{"className":"bz-form-widget","id":"bz-form-widget-0","widgetCategoryId":"10062"},"children":[" "]},{"component":"p","children":[" "]},{"component":"p","children":["To be clear, this supply system is not a debt or a loan – it's a tool small businesses and suppliers can use to free up capital via third-party funder. While third-party funding institutions may charge a fee for each transaction, this is not an asset-based lending program. This is the main difference between supply chain financing and invoice factoring."]},{"component":"h2","props":{"id":"what-is-invoice-factoring"},"children":["What is invoice factoring?"]},{"component":"p","children":["Unlike supply chain financing, invoice factoring is a type of small business loan. Invoice factoring is a tool businesses can use to get money on outstanding invoices immediately. They work with a third-party lender that will buy outstanding accounts receivable. While it may sound similar to supply chain financing, this is an asset-based lending program where a company's accounts receivable acts as collateral."]},{"component":"p","children":["Invoice factoring can be a quick, easy way to get cash upfront. Keep in mind that factoring companies will charge fees for each transaction and may buy accounts receivable at discounted rates."]},{"component":"h2","props":{"id":"supply-chain-financing-vs-factoring-whats-the-difference"},"children":["Supply chain financing vs. factoring: What's the difference? "]},{"component":"p","children":["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 a discount off the invoice price."]},{"component":"p","children":["The benefit to the supplier is early payment, usually at a discounted rate less than factoring. It's a new electronic take on the old 2/10 net 30 payment term, but the buyer initiates the request for early payment through the use of technology."]},{"component":"h2","props":{"id":"pros-and-cons-of-invoice-factoring"},"children":["Pros and cons of invoice factoring"]},{"component":"h3","children":["Pros"]},{"component":"ul","children":[{"component":"li","children":["You get quick access to capital."]},{"component":"li","children":["Accounts receivable is responsible for final payment."]}]},{"component":"h3","children":["Cons"]},{"component":"ul","children":[{"component":"li","children":["Your accounts receivable is treated as collateral."]},{"component":"li","children":["You may not receive the full amount of an outstanding account."]}]},{"component":"h2","props":{"id":"pros-and-cons-of-supply-chain-financing"},"children":["Pros and cons of supply chain financing"]},{"component":"h3","children":["Pros"]},{"component":"ul","children":[{"component":"li","children":["It's not an asset-based lending program."]},{"component":"li","children":["It's a fast way to free up cash."]}]},{"component":"h3","children":["Cons"]},{"component":"ul","children":[{"component":"li","children":["The third-party company may take a small fee."]}]},{"component":"h2","props":{"id":"will-supply-chain-financing-replace-invoice-factoring"},"children":["Will supply chain financing replace invoice factoring?"]},{"component":"p","children":["No, I don't believe so. Why?"]},{"component":"p","children":["Supply chain financing does not change the unbalanced relationship 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."]},{"component":"p","children":["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 interest to offer it to all their suppliers, offering 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. The power remains with the buyer, and the supplier remains at their mercy for payment."]},{"component":"h3","children":["Invoice factoring gives you more control."]},{"component":"p","children":["Factoring changes this dynamic, because it is initiated and controlled by the supplier. With 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."]},{"component":"h3","children":["Technology is making invoice factoring paperless."]},{"component":"p","children":["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 e-invoicing and e-payment makes factoring easier and more streamlined. Online vendor portals make it easy for a factor to view and confirm invoices. "]},{"component":"h2","props":{"id":"be-in-control-of-your-cash-flow"},"children":["Be in control of your cash flow."]},{"component":"p","children":["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 as dozens of other customers. The early payment offer was available on the U.S. invoices only of this one customer."]},{"component":"p","children":["So, if 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?"]},{"component":"p","children":["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 instead of working with a different program, process and platform for each customer. "]},{"component":"p","children":["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 give them the control to manage their cash flow as needed."]},{"component":"p","children":[{"component":"i","children":["Matt D'Angelo contributed to the writing in this article. "]}]}]},"resource":null,"sponsorship":{"sponsorType":"no-sponsor","name":null,"thumbnail":null,"bio":null,"slug":null,"status":null,"social":{"website":null,"linkedin":null,"twitter":null,"facebook":null}},"thumbnail":{"path":"https://staging.business.com/images/content/5eb/d37507b4374f9448b4593/1500-0-","caption":"fizkes / Getty Images","isBlurred":false},"bestPicks":null},"related":{"relatedArticles":[{"title":"Invoice Financing, Factoring and Invoice-Backed Line of Credit: What’s the Difference?","canonical":"https://www.business.com/articles/invoicing-accounts-receivable-solutions/","slug":"invoicing-accounts-receivable-solutions","thumbnail":"https://www.business.com/images/content/5aa/95c1b1039eb41518b4567/1500-0-","dek":"If you have outstanding accounts receivable, it's important to know your options.","lastModified":"2018-03-14T17:40:00Z","published":"2018-03-14T17:40:00Z","sponsored":false},{"title":"SBA Loan Default: A Complete Guide for 2020 and Beyond","canonical":"https://www.business.com/articles/sba-loan-default-guide/","slug":"sba-loan-default-guide","thumbnail":"https://www.business.com/images/content/5dc/047af7b437483068b4572/1500-0-","dek":"Here's comprehensive guide to all your questions about SBA loan default, forgiveness and the SBA Offer In Compromise.","lastModified":"2019-11-04T15:00:00Z","published":"2019-11-04T15:00:00Z","sponsored":false},{"title":"The 5 Biggest Financial Mistakes Small Business Owners Make (and How to Avoid Them)","canonical":"https://www.business.com/articles/smb-financial-mistakes/","slug":"smb-financial-mistakes","thumbnail":"https://www.business.com/images/content/5bd/b58b37b43742e228b4588/1500-0-","dek":"These mistakes can sink your business, but they're easy to avoid.","lastModified":"2018-11-01T07:00:00Z","published":"2018-11-01T07:00:00Z","sponsored":false},{"title":"What's a Healthy Level of Business Debt?","canonical":"https://www.business.com/articles/healthy-business-debt/","slug":"healthy-business-debt","thumbnail":"https://www.business.com/images/content/5b6/b3dd992a3a4d9668b456a/1500-0-","dek":"Financing can accelerate any business's growth, but it's vital to approach it properly.","lastModified":"2018-08-08T19:00:00Z","published":"2018-08-08T19:00:00Z","sponsored":false},{"title":"How to Apply (and Get Approved) for a Business Loan","canonical":"https://www.business.com/articles/how-to-apply-for-a-small-business-loan/","slug":"how-to-apply-for-a-small-business-loan","thumbnail":"https://www.business.com/images/content/5e6/8eb1d5a215ed20a8b456e/1500-0-","dek":"Many businesses need loans to launch or grow. This guide will help you apply for a business loan and improve your chances of approval.","lastModified":"2020-06-29T15:35:00Z","published":"2020-03-13T12:00:00Z","sponsored":false},{"title":"How to Get Your Business Loan Application Approved","canonical":"https://www.business.com/articles/how-to-get-a-business-loan-approved/","slug":"how-to-get-a-business-loan-approved","thumbnail":"https://www.business.com/images/content/5f1/70ca09c658a9f208b4567/1500-0-","dek":"Learn how to better position yourself to secure funding to start or grow your business.","lastModified":"2020-07-21T16:19:00Z","published":"2020-03-24T16:10:00Z","sponsored":false},{"title":"Best Practices to Follow Before Applying for a Small Business Loan","canonical":"https://www.business.com/articles/sba-loan-application-best-practices/","slug":"sba-loan-application-best-practices","thumbnail":"https://www.business.com/images/content/5d9/51e397b437431358b4594/1500-0-","dek":"These practices will help you quickly and successfully find the best loan for your small business.","lastModified":"2019-10-04T16:00:00Z","published":"2019-10-04T16:00:00Z","sponsored":false},{"title":"Finance Jargon: Learn to Talk the Talk","canonical":"https://www.business.com/articles/know-your-finance-basics-to-impress-in-meetings/","slug":"know-your-finance-basics-to-impress-in-meetings","thumbnail":"https://www.business.com/images/channel/finance.jpg","dek":"Use These Finance Buzzwords That Are Sure to Impress","lastModified":"2014-10-14T13:00:00Z","published":"2014-10-14T13:00:00Z","sponsored":false},{"title":"What Are Merchant Cash Advances and Working Capital Loans?","canonical":"https://www.business.com/articles/merchant-cash-advance-working-capital-loan/","slug":"merchant-cash-advance-working-capital-loan","thumbnail":"https://www.business.com/images/content/5e3/ac2647b437464388b4567/1500-0-","dek":"Should you consider a merchant cash advance or working capital loan to alleviate your cash flow problems? Or would that make things worse?","lastModified":"2020-06-15T12:20:00Z","published":"2020-02-07T13:15:00Z","sponsored":false},{"title":"I Don't Have the Cash to Run My Business: Invoice Factoring to the Rescue","canonical":"https://staging.business.com/articles/i-dont-have-the-cash-to-run-my-business-invoice-factoring-to-the-rescue/","slug":"i-dont-have-the-cash-to-run-my-business-invoice-factoring-to-the-rescue","thumbnail":"https://staging.business.com/images/content/55c/35e212f87b19c678b4577/1500-0-","dek":"Every day, businesses are turned down by the bank system. Help may be found in a niche financial industry called invoice factoring.","lastModified":"2015-08-06T13:00:00Z","published":"2015-08-06T13:00:00Z","sponsored":null},{"title":"Bank of America Executive on What It Takes to Get a Business Loan","canonical":"https://www.business.com/articles/bank-of-america-bank-loan-tips/","slug":"bank-of-america-bank-loan-tips","thumbnail":"https://www.business.com/images/content/5b2/27dcd51ee475a328b4580/1500-0-","dek":"The head of small business lending highlights the advantages of getting a bank loan.","lastModified":"2018-06-14T15:00:00Z","published":"2018-06-14T15:00:00Z","sponsored":false},{"title":"What SMBs Need to Know When Choosing a Small Business Loan","canonical":"https://www.business.com/articles/choosing-a-small-business-loan/","slug":"choosing-a-small-business-loan","thumbnail":"https://www.business.com/images/content/5b0/459ae92a3a459378b4575/1500-0-","dek":"Here's everything you need to know about acquiring a loan for your small business.","lastModified":"2018-05-22T18:00:00Z","published":"2018-05-22T18:00:00Z","sponsored":false}],"relatedReviews":[{"doc_type":"category","thumbnail":"https://staging.business.com/images/rz/5e46e2fc5a215eab4d8b457c/taxes_pano_Prostock-Studio_getty.jpg","canonical":"https://staging.business.com/categories/best-tax-debt-relief-services/","title":"The Best Tax Debt Relief Services of 2021","dek":"Looking for the best tax debt relief service? We have easy-to-read, unbiased expert reviews and feature comparisons of the best and cheapest services.","slug":"best-tax-debt-relief-services","lastModified":"2021-03-23T20:42:00Z"},{"doc_type":"category","thumbnail":"https://staging.business.com/images/rz/5dfbca819c658adc118b4568/Payroll_AndreyPopov_Getty.jpg","canonical":"https://staging.business.com/categories/online-payroll-services/","title":"The Best Online Payroll Services of 2021","dek":"Our team has compared the best online payroll services for 2021. See up-to-date reviews and costs for the top services.","slug":"online-payroll-services","lastModified":"2021-03-19T20:05:00Z"},{"doc_type":"category","thumbnail":"https://staging.business.com/images/rz/5df3d8695a215e58428b4570/POS_GETTY_DERO2084.jpg","canonical":"https://staging.business.com/categories/best-pos-systems/","title":"The Best POS Systems of 2021","dek":"Before you choose a POS system, check out our reviews of the best picks for 2021. ","slug":"best-pos-systems","lastModified":"2021-03-17T17:33:00Z"}],"relatedSponsoredArticles":null}},"pageContext":{"displayModified":"2020-05-14T14:52:00.000Z","template":"v1","title":"Supply Chain Finance or Invoice Factoring: Which Is Better for Managing Cash Flow?","meta":{"robots":"index, follow"},"docType":"articles","slug":"supply-chain-finance-or-invoice-factoring","canonical":"https://staging.business.com/articles/supply-chain-finance-or-invoice-factoring/","skipTOC":false}},"staticQueryHashes":[]}