How does Supply Chain Finance compare with Invoice Factoring and Discounting?
Trade receivables provide lenders the security and means to fund businesses to help their working capital.
Supply Chain Finance (also known as Supplier Finance and Reverse Factoring) is the financial process of linking various parties to a transaction; the seller, buyer and lender. This lowers the cost of finance and improves the efficiency of the payment cycle and optimises the working capital for both the seller and buyer.
The process works by the supplier selling their receivables or invoices at discount to the lender (the factor) for the benefit of early payment. The discount is the upfront cost of selling to the lender to receive early payment. It however doesn’t absolve the responsibility of the seller’s invoice from being repaid to the lender. The buyer settles payment of the invoice directly with the lender within their usual terms and may even have an arrangement to settle later to extend their days payable outstanding (DPO) as a working capital facility to help their liquidity. The working capital solution works well for the seller as the lender typically measures the risk on a buyer who are often more credit-worthy and therefore can be an effective low-cost solution.
Benefits to supplier
· Optimise working capital: Reduce days sales outstanding (DSO) by accelerating the cash- conversion-cycle to release working capital tied up in invoices. This also reduces the cost of carrying receivables (cost of providing credit to its customer).
· Improve cash flow management/forecasting: Predictability over timing of invoice settlement by lender.
· Easy access to financing: No impact to credit rating or ability to obtain other types of financing.
· Potential to increase sales: The faster a seller collects cash, the faster it can reinvest that into growing their business.
· Reduce operational costs: Outsource credit administration and receivables collection and management.
Benefits to buyer (typically a large corporate):
· Optimise working capital: Extend their days payable outstanding (DPO) thereby enhancing its working capital position, providing it a source of cash because the company is taking longer to pay its invoices.
· Reduce operational costs: Decrease in the number of supplier queries as payment process becomes more streamlined.
· Reduce supply-chain risks: Suppliers have greater financial certainty and stability and are therefore in a better position to fulfil orders on time and maintain continuous supply.
· Opportunity to negotiate better prices and extend payment terms: Assisting suppliers with cash for goods or services upfront gives the large corporate a relationship advantage and therefore places the buyer in a position to negotiate discounts from its suppliers
How does Supply Chain Financing work?
A large corporate (Buyer) enters into a Supply Chain Finance arrangement with a Lender who agrees to offer early payment to its Suppliers for invoiced goods and services. The Lender is notified by the Buyer that an invoice is approved for payment. The Lender then offers immediate payment to the supplier, knowing the invoice will be paid by the Buyer. On settlement date, the Buyer pays the full invoice amount due to the Lender.
Supply Chain Finance benefits both Buyers and Suppliers, providing financial security and predictability in a strong partnership. For the Buyer, the increased robustness of the supply chain facilitates stability and profitability. For Suppliers, cash received today rather than later provides the potential for business growth.
Invoice Factoring and Invoice Discounting
Factoring and Discounting are typically facilities that the supplier initiates directly with the lender and is a more direct approach may not necessarily reap the same levels of benefits of supply chain finance, which is typically buyer initiated.
Factoring is where the lender manages the supplier’s sales ledger, credit control and collection for settlement of their invoices whereas Invoice Discounting is where the lender retains control of their own sales ledger and collects in the usual way. The area confidentiality also comes into play as Factoring manages the collection and therefore is known to the supplier’s buyer whereas Discounting typically does not.
How does invoice financing work with Satago?
Satago offers a unique Invoice Discounting solution that fits it with most businesses’ invoicing process. Your business continues to raise invoices with its customers in the usual fashion, and once you connect your accounting software to Satago, invoices are provided each day allowing Satago to automatically price each invoice so that when you need early payment, it is is simple as logging in and adding each eligible invoice to the basket. Satago carries out brief checks with your customer (not disclosing its service) to ensure the validity of each invoice, and then makes payment to your business account typically on the same day. The amount advanced is up to 90% of the value of the invoice, and with fees starting from 1% of the advance amount and is charged only for each day the invoice is financed for. When the invoice is due, your customer pays Satago directly. You need to arrange for payment to be made to a ‘trust account’ we create for you and you remain in control of the collection (i.e. Invoice Discounting). We then deduct our fees and return the remaining portion of the invoice value to your bank account.