A guide to invoice finance

Invoice finance is a way for companies to receive cash against accounts receivable. Financing invoices helps unlock working capital to pay employees and suppliers as well as to invest in operations and growth.

Invoices can be financed using a variety of techniques: factoring, invoice discounting, receivables discounting, buyer-facilitated factoring, reverse factoring, dynamic discounting, etc. How do these methods differ?

Invoice finance solutions all belong to the family of Supply Chain Finance (SCF) techniques. To understand these instruments, it's important to appreciate their basic characteristics:

  • Supplier-led versus Buyer-led solutions, indicating who initiates the facility and how data is exchanged between buyers, suppliers and the financier;
  • In certain cases financing is extended to suppliers without recourse (receivables discounting), while in other cases invoices simply form the basis of lending products, with ultimate credit risk resting against the Supplier;
  • In invoice finance, fees are typically based on the discounting method: financing cost is deducted from the invoice amount according to the expected financing period, rather than added as an interest charge on top of the loan amount.

This is a guide for techniques that are typically used to manage working capital in ongoing buyer-supplier relations, while many other instruments are used in international trade finance. The taxonomy proposed by the Global Supply Chain Finance Forum provides more information on the entire product family.

Supplier-led invoice finance solutions

Factoring, invoice discounting, and receivables discounting are some of the typical Supplier-led solutions that help turn unpaid sales invoices into cash.

Factoring: In factoring, a supplier sells its unpaid sales invoices to a financier (a factoring company), who makes a partial advance payment to the supplier immediately (usually 80-90% of the invoice amount), while final payment (remaining 10-20% minus the discount fee) is made when the buyer settles. The financier typically takes responsibility for collections, which mitigates risks for the financier and makes the entire process more efficient. The buyer is expected to confirm debt to the financier for risk mitigation.

In case payments are significantly delayed or default completely, financiers hold recourse to the supplier. This puts ultimate risk on the supplier, which implies that the business must be credit-worthy.

Invoice discounting: In invoice discounting, a supplier requests an advance payment against a known unpaid invoice. The financier makes a partial or even full outpayment to the supplier for the invoice period and expects repayment on the expected settlement date. The supplier maintains responsibility for collections and in case of payment defaults, the supplier needs to work out a solution (renew the repayment date or refinance the obligation otherwise). In terms of credit risk, invoice discounting is similar to a revolving credit line to the company.

The advantage of invoice discounting is that the buyer need not be involved in the process.

Receivables finance: In receivables discounting, a supplier sells the unpaid invoice to a financier, who pays the amount in full (minus the discount fee). The rights and obligations are assigned to the financier, which means that the financier assumes full credit risk as well as responsibility for collections. There is no recourse to the supplier should the payment default.

This technique is available to suppliers regardless of credit profile, while buyers need to have strong financials and exhibit reliable payment behaviour.

Buyer-led invoice finance solutions

Buyer-facilitated factoring, dynamic discounting, and reverse factoring are the primary Buyer-led solutions that allow their suppliers to have access to working capital, and lengthen payment terms.

Reverse factoring (a.k.a. payables finance, Supply Chain Finance): a buyer sets up credit facilities with one or more financiers. In addition to providing data on payables, the buyer also takes on a payment obligation to the financier. This confirmation of debt allows the creditor to collect the financed amount even in case delivery risk materialises.

As credit risk is wholly shifted on the buyer, the financier can now buy the receivables from the supplier without recourse. The supplier assigns the receivable to the financier and receives payment in full (minus the discount fee). The financiers take responsibility for collections and the supplier can consider the invoice settled. Moreover, the instrument supports financing prepayments externally.

Buyer-facilitated factoring with recourse to the supplier: In this hybrid structure, a buyer sets up credit facilities with financiers and streamlines data exchange between its accounting function and the financier(s), but does not take on an irrevocable payment obligation. At a minimum, the data allows validating receivables, but may also include supporting trade documents, i.e. supply agreements, delivery notes, invoices, etc.

Similarly to factoring, the supplier sells its unpaid sales invoices to a financier, who makes a partial advance payment to the supplier immediately (usually 90% of the invoice amount), while the final payment (the remaining 10 minus the discount fee, also called a rebate) is made when the buyer settles. The financier typically takes responsibility for collections, which mitigates risks for the financier and makes the entire process more efficient.

Buyer-facilitated factoring with recourse to the supplier is a good fit in case debtors need to leave room for settlements or refrain from opening conventional buyer-facilitated factoring credit limits. In this arrangement, financiers hold recourse to the supplier and can recover the debt in case of settlement discrepancies. As ultimate risk on the supplier, the business must be credit-worthy in its own right.

Dynamic discounting: In dynamic discounting, a buyer offers to pay suppliers ahead of the agreed due date in exchange for a discount. There is no financier involved, which means the solution is only available in case the buyer is cash-rich and incentivized to use that cash for early payments.

SupplierPlus runs on reverse factoring model

Feature Deferred payment Reverse factoring with SupplierPlus Factoring Mono-bank reverse factoring
All Suppliers can be financed
No cost to the Buyer /
No harm to Suppliers or purchase prices
Suitable for cross-border Suppliers
Working with a pool of banks /
Full control over which Suppliers can request financing
No credit checks of Suppliers
/ Depending on a specific financial structure

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