How Does Invoice Finance Differ From Supply Chain Finance?

Supply Chain Finance and Invoice Finance can be effective solutions for raising working capital. With the pandemic stretching supply chains and liquidity for businesses worldwide, these financing solutions have become increasingly popular ways 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.

Supply Chain Finance Explained

Supply Chain Finance, also known as reverse factoring, is a type of funding that allows businesses to strengthen their supply chain and optimise cash flow.

A buyer of goods or services will work with a third party 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.

For example, a supplier may receive $0.98 on the dollar for an invoice paid upfront. 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 cover operating costs, purchase equipment, and invest in your business.

Supply Chain Financing benefits the buyer as they can retain the cash payable to their suppliers for longer. It’s also a way for larger businesses to support their smaller suppliers.

Invoice Finance Explained

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 unpaid invoices as security. Instead of waiting 30+ days for a customer to pay, you can submit the invoice for financing and receive a cash advance of up to 95% of the invoice value within 24 hours. The remaining balance, fewer fees, is released once the customer has paid the invoice.

Unlike Supply Chain Finance, this arrangement is made between the supplier and the Invoice Financing company and doesn’t usually involve the buyer.

It’s a flexible form of business finance that can be adjusted to a company’s needs.

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.

Common Misconceptions of Supply Chain Finance

Supply Chain Finance has become more widely used in Australia over the last few years. But there are a lot of common misconceptions about how the funding solution works and which companies it is designed to help.

Let’s take a look at three of the biggest myths surrounding Supply Chain Financing:

It is Only Suitable for Large Companies

This was once largely accurate, but Supply Chain Finance has evolved and is now more accessible. The primary Supply Chain Finance providers used to be traditional banks focused on working with larger companies and corporations.

But with advances in technology to streamline the processes involved, and the rise of non-bank lenders, Supply Chain Finance is now a viable option for SMEs. It allows smaller companies to improve cash flow and strengthen their supply chain.

Suppliers Have To Extend Their Payment Terms

Supply Chain Finance brings a third party into the agreement between the supplier and buyer. But it does not mean that the supplier needs to alter their existing net payment terms.

It provides flexibility for the buyer to pay for goods and services later while allowing the supplier to receive 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 supports both parties and strengthens the entire supply chain.

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 business financing. But the impact of the global pandemic 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 during an economic downturn, Supply Chain Finance providers have increased funding to businesses of all sizes.

The use of Supply Chain Finance has increased as businesses look to navigate a possible post-pandemic recession. Globally, Supply Chain Finance volumes rose to $1.8 trillion USD in 2021, a 38% increase on 2020.

Common Misconceptions of Invoice Finance

Like Supply Chain Finance, there are also several myths about Invoice Financing. This type of funding has been around for a long time, but there are still common misconceptions, including:

You Are Required to Finance Every Invoice

You don’t need to submit your entire accounts receivable ledger to a third party to qualify for Invoice Financing. It’s a flexible solution that 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. This can be beneficial if you supply one or two large companies that generate a significant percentage of your sales revenue.

There is also 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.

Invoice Finance Ties You to a Long-Term Contract

There are lots of options when it comes to choosing an Invoice Finance provider. While some providers may only offer long-term contracts, others like ScotPac offer flexible come-and-go funding solutions with no lock-in contracts.

You can choose the length of the contract and how many invoices you want to finance.

It’s for Businesses That Are Struggling

One of the biggest Invoice Finance myths is that it is mainly used by failing businesses. But cash flow gaps can become an issue for every business, including those that are profitable and successful.

Growing businesses often experience cash flow gaps due to extended payment terms. Invoice Finance helps to plug those gaps 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 the same as getting a business loan to keep your company afloat.

Which Is the Best Option for Your Business?

The right funding solution for your business will depend on your unique circumstances.

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

There is no one-size-fits-all funding solution when it comes to financing. Getting the right funding in place can act as a catalyst for growth and support your business.

We offer a range of Supply Chain Finance and Invoice Financing solutions that can be tailored to your unique circumstances. We’ll help you unlock capital so you can invest in growth.

Contact us today to get to work on securing the funding your business needs to thrive.