Accounts Receivable Factoring vs Supply Chain Finance

Accounts Receivable Factoring vs Supply Chain FinancingWith each passing day it seems like a new technology is disrupting a traditional business model. Certainly an industry that has been around as long as factoring is not immune to disruption from innovation, and currently supply chain finance is one of these disruptors. However, it is important to understand the differences between factoring and supply chain financing so that you may determine which is right for your business. While they both offer access to improved cash flow, beyond that they don’t really have all that much in common.

Perhaps the biggest difference between accounts receivable factoring and supply chain finance is who decides to use the service. With factoring, the decision rests entirely with the supplier.  The buyer has no say in whether or not an invoice is factored. With supply chain finance it is the buyer’s decision when and if to offer quicker payment on an invoice, and it is up to the supplier to accept that offer. As a result, a supplier can not rely on supply chain finance to fund their business since it may or may not be offered to them. If a supplier needs immediate access to working capital so that they can run or grow their business, factoring is the best way to guarantee that they always have access to the working capital they need.

The next major difference is which buyers you can get immediate funding on. In general, factoring companies will work with all of your buyers, regardless of how large or small they are. However, supply chain finance is typically only offered by major retailers as they are the ones who do enough volume to make supply chain financing affordable. Besides, typically smaller retailers are not cash rich and can’t afford to make early payments. To further complicate matters, each one of your buyers who does offer supply chain finance may do so with a different company, meaning you need to manage your accounts across multiple financing platforms, whereas with factoring you only ever work with a single factoring company so it is a much more streamlined process.

Of course the fee is also a major difference. With factoring, the fee is part of the agreement that you have with your factoring company, it does not change. With supply chain finance, the fee is not fixed, you need to make an offer to your buyer and your buyer needs to accept it. If your buyer is cash rich than they may take a lower offer and supply chain finance could be cheaper than factoring. However, for a buyer who is not cash rich or is struggling, they may only be accepting higher offers and factoring could be the cheaper option.

Another issue is timing, many buyers who offer supply chain finance may wait 7-10 days to do so as they need to check your products into their system and make sure nothing is damaged before they can approve it for payment. Then they need to ask you to make an offer. If your offer isn’t acceptable then you typically need to wait until the following day before you can make a counter-offer. With supply chain finance it may take two weeks or longer before you receive funding. However, factoring companies offer you funding the same day that you ship and invoice your customer.

Finally, credit insurance may be the most important difference. Of course, you might say that you don’t need credit insurance if you are getting early payment with supply chain finance, because after all, you are getting paid. However, it isn’t quite that simple. First of all, there is no guarantee that supply chain finance will be available from one of your buyers, even if they did offer it to you in the past, there is no guarantee it will be offered in the future.

The other issue has to deal with US bankruptcy law. When a company files for bankruptcy, the bankruptcy court may require you to return any payments you received within 90 days prior to the filing. The reason being is they don’t want creditors receiving preferential treatment, all creditors should be treated equal. Of course, you don’t need to return these funds if you can prove that you received them in the normal course of business, but if you are offering a buyer a discount to pay you early, then there is nothing normal about the transaction. This recently became a problem when Toys’R’Us filed for bankruptcy. Toys’R’Us partnered with C2FO to offer supply chain finance, and there is no doubt that everyone who received an early payment from Toys’R’Us had to later return those funds to the bankruptcy court.

With non-recourse factoring however, not only does your factoring handle all of the credit checking for you, but they also insure your receivables. So if one of your buyers does file for bankruptcy or goes out of business, you still get to keep the funds that your factoring company gave you. Furthermore, since factoring companies don’t request early payment, it is quite possible that they may be able to prove that payment was received in the normal course of business and they too would not be required to return the funds.

While supply chain finance can potentially be cheaper than factoring with stronger retailers, it can also be more expensive and does not offer all of the benefits that you receive with factoring. Furthermore, it is only available if your customer wants to offer it to you. In many ways, supply chain finance is just a more expensive way of offering your customers a discount for early payment such as “1% 15 net 30” day terms. On the other hand, factoring is a much safer and more reliable way of funding your business. Factoring can be used with all of your accounts, and has very similar pricing to supply chain finance.

If you could benefit from improved cash flow and would like to give a factoring a try, give DSA Factors a call at 773-248-9000. With over 30 years experience helping companies improve their cash flow, DSA Factors has the money to make your company grow.