Updated on 11th July 2023
Supply Chain Finance and Invoice Finance can both be effective solutions for raising working capital. With the COVID-19 pandemic having stretched supply chains and liquidity for businesses worldwide in recent years, these financing solutions have only become more popular as avenues to manage cash flow.
While there are similarities in how these funding solutions work, there are also significant differences. It’s important to understand the differences so you can choose the right solution for your business.
In this guide, we’ll explore how Invoice Finance differs from Supply Chain Finance and the common misconceptions around both financing solutions. We’ll also explore which businesses are best suited to each funding option.
Invoice Finance vs Supply Chain Explained
For the key differences between Invoice Finance and Supply Chain Finance, click here.
What is Supply Chain Finance?
Supply Chain Finance, also known as reverse factoring, is a type of funding that allows businesses to strengthen their supply chain and optimise their cash flow.
A buyer of goods or services will work with a third party, such as a financial institution, to pay the invoices owed to suppliers upfront. In exchange for early payment of their invoices, the supplier provides a discount on the amount owed.
How it works
For example, a supplier may receive $0.98 on the dollar for an invoice paid upfront. In other words, they are willing to forgo the $0.02 for the benefit of having the invoice settled immediately and with no delay.
How it helps
For some suppliers, this can be an excellent way to free up working capital that would otherwise be held up in unpaid invoices. The additional working capital can be used to take advantage of growth opportunities, cover operating costs, purchase new equipment, or provide funds for any other re-investment in the business.
Supply Chain Financing benefits the buyer as well. They get to retain the cash payable to their suppliers for longer without having the pressure of paying within strict term limits that restrict their ability to operate and grow.
This financing facility is a great way for larger businesses to support their smaller suppliers.
Common misconceptions
Supply Chain Finance has become more and more widely used in Australia over the last few years. But there are still a lot of common misconceptions about how the funding solution works and which companies it is designed to help.
1. It’s Only Suitable for Large Companies
Once upon a time this may have been the case, but Supply Chain Finance has evolved and is now more accessible to more businesses. The primary Supply Chain Finance providers used to be traditional banks focused on working with larger companies and corporations.
Thanks to advances in technology, the streamlining of processes involved and the rise of non-bank lenders, Supply Chain Finance is now a viable option for SMEs as well. It allows smaller companies to improve cash flow and strengthen their supply chain, and in time become medium and larger sized businesses.
2. Suppliers Have To Extend Their Payment Terms
Supply Chain Finance brings a third party into the agreement between the supplier and buyer, i.e., the financial institution.
But it does not mean that the supplier needs to alter their existing net payment terms.
It simply provides flexibility for the buyer to pay for the goods and services at a later point while still ensuring the supplier receives payment early. The finance company covers the upfront payment to the supplier, and the buyer pays the finance company when the invoice is due.
This benefits both parties in the transaction and consequently strengthens the entire supply chain.
3. Supply Chain Finance Isn’t a Reliable Form of Funding
There is a misconception that Supply Chain Finance isn’t as reliable as other forms of traditional business financing. But the impact of a global pandemic has since revealed that Supply Chain Finance is more reliable than other more conventional funding solutions.
While banks and other financial institutions typically become more risk averse and implement stricter lending criteria due to economic downturns, Supply Chain Finance providers have increased funding to businesses of all sizes.
It’s informative to note that the use of Supply Chain Finance has increased significantly. Between 2020 and 2021 global Supply Chain Finance volume rose to $1.8 trillion USD. That’s a 38% increase and reflects an ongoing trend in more recent years.
What is Invoice Finance?
Invoice Finance is similar to Supply Chain Financing in that suppliers receive early payment for outstanding invoices. However, the structure of the financing agreement is different.
With Invoice Financing, the supplier can access funding by using their unpaid invoices as security. Instead of waiting 30 days or more for a customer to pay, the business can submit the invoice for financing and receive a cash advance of up to 95% of its value within 24 hours. The remaining balance, less any applicable fees, is released once the customer has paid the invoice.
How it works
Invoice Finance leverages the assets of the business to secure funding. You don’t need real estate collateral or a long trading history to access Invoice Finance.
Unlike Supply Chain Finance, this financial arrangement is made between the supplier and the Invoice Financing company and doesn’t usually involve the buyer at all. It’s a flexible facility that can be adjusted and tailored according to a company’s needs, size and objectives.
How it helps
Invoice Finance allows suppliers to access the cash owed to them sooner. This can help free up disruptions in cash flow cycles, allow the ongoing operations of the business to be funded and better enable long-term growth and success.
Common misconceptions
Like Supply Chain Finance, there are also several myths about Invoice Financing. This type of funding has been around for a longer time, yet we’ve tackled some of the more pervasive myths surrounding this facility here.
1. You Are Required to Finance Every Invoice
This is not true. Businesses do not need to submit their entire accounts receivable ledger to a third party to qualify for Invoice Financing. As a flexible financial solution, it can be tailored to the needs of your business.
For example, Selective Invoice Finance allows you to choose which invoices you want to submit for financing and when to submit them. This can be beneficial if you supply one or two large companies that generate a significant percentage of your sales revenue.
There is also always the option of Invoice Discounting or Invoice Factoring, also known as Debt Factoring. With Invoice Discounting, the funding facility is confidential, and you are responsible for collecting payment from your customers. Debt Factoring is a more comprehensive funding facility that includes additional collections and account management services. You can learn more about these funding options in our guide, Invoice Discounting vs Factoring.
2. Invoice Finance Constricts You with a Long-Term Contract
There are many options when it comes to choosing an Invoice Finance provider. While some providers may only offer long-term contracts, others like our team here at ScotPac, offer flexible funding solutions with no lock-in contracts to allow businesses to come and go as their working capital needs require.
With ScotPac, you can choose the length of the contract and control as many invoices you want to submit for financing.
3. It’s for Struggling Businesses Only
This is perhaps one of the biggest myths about Invoice Finance. The reality is that cash flow gaps can become an issue for every business, including those that are profitable, growing and successful.
Expanding businesses often experience cash flow gaps due to extended payment terms or the need for one-off investment and opportunity capitalisation. Invoice Finance helps to plug those gaps, smooth out cash flow and increase liquidity without tying the company down to long-term debt.
Invoice Finance releases the funds that are already owed to your business. It’s not a business loan obtained by companies trying to maintain financially afloat.
For more common misconceptions around this type of financing read our Invoice Financing Myths Debunked article here.
Supply Chain and Invoice Finance: The Key Differences
1. Structure
Invoice Finance involves a business selling its outstanding invoices to a financial institution, as a third party, in exchange for a percentage of the invoices’ value upfront.
Supply Chain Finance does not involve the buyer at all and instead is an arrangement between the supplier and the financial institution to provide early payment.
2. Scope
Invoice Finance unlocks tied up capital in outstanding invoices primarily benefiting a specific business, i.e., the supplier, by supplying them with funds.
Supply Chain Finance benefits the entire supply chain by facilitating early payment for the suppliers while still allowing extended payment terms for the buyer.
3. Terms
Invoice Finance aligns with the original payment terms between the buyer and supplier.
Supply Chain Finance offers extended terms for the buyer and allows earlier payment for the supplier.
4. Approval Criteria
Invoice Finance requires the creditworthiness of the supplier to be assessed and approved.
Supply Chain Finance requires the creditworthiness of the supplier’s buyers/customers to be assessed and approved.
Which Is the Best Option for Your Business?
The right funding solution for your business will depend on your unique circumstances: Consider your business’s needs and objectives.
If you’re a larger company dealing with smaller suppliers, Supply Chain Finance can free up cash flow while supporting your suppliers with early payments. You can maintain liquidity while making the most of your suppliers’ credit terms.
For suppliers with significant working capital tied up in accounts receivables, Invoice Finance can be more beneficial. It’s an opportunity to bring forward cash payments and improve liquidity.
Strengthen Your Cash Flow With ScotPac’s Invoice Finance and Supply Chain Facilities
There is no one-size-fits-all funding solution when it comes to financing. That’s why the ScotPac lending specialists provide flexible, tailored financial arrangements for all of our clients.
Getting the right funding in place with our specialists can be just the catalyst you need for growth and to future proof your business.
We offer a range of Supply Chain Finance and Invoice Financing solutions for all unique business circumstances. If you’re ready to unlock the capital frozen in your assets so you can invest in growth, use our simple enquiry form or give us a call today. We’ll get to work on securing the funding your business needs to thrive.