Skip to main content

All You Need to Know About Factoring In Supply Chain Management

Factoring In Supply Chain Management

Did you know that supply chain finance programs can help you earn cash quickly? But, before you decide to tread on this path, make sure you are aware of other financing options as well. 

While a bit tricky, supply chain financing can allow small businesses to extend payment dates, keep their credit scores intact, and keep the suppliers’ cash flow smooth. 

In this case, suppliers receive advanced payments on their pending invoices from a third-party funder. When the small business receives the payment, the money is then returned to the third-party funder. 

Come Invoice Factoring: How Does It Impact Supply Chain Management? 

Invoice factoring is a small business loan. It is often used to get money on outstanding invoices immediately. In this case, also, the third-party lender buys the accounts receivable. Although it sounds similar to supply chain financing, this lending is asset-based. Here in the company’s accounts receivable acts as collateral. 

Invoice factoring is a great way to get cash upfront. However, factoring companies may charge fees for each transaction and may also buy accounts receivable at lower rates. 


Pros and Cons of Invoice Factoring


Here are some pros and cons of invoice factoring


Pros

● You get instant access to capital

● Your accounts receivable is responsible for the final payment


Cons

● Your accounts receivable will be treated as collateral.

● You may not receive full payments as the lender will take away a significant portion of the same.



Will Supply Chain Financing Replace Invoice Factoring? 

Well, the clear answer is no. 

Supply chain financing does not address the unbalanced relationship between big buyers and smaller suppliers. 

Yes, factoring practices have been in use for the past decades. This is because when small suppliers sell to a bigger buyer, the latter determines who will pay their invoice irrespective of the payment terms. 

However, in the case of supply chain finance, it is initiated and controlled by the buyer. The buyer decides who can participate, how quickly they will be paid, and the discounts that will be demanded. 

Some buyers may be cashless, may not be interested in offering it to all supplies, and have a bias towards the bigger suppliers. At the same time, some may offer it today and say no to the offer tomorrow because of poor cash flow. Thus, the suppliers always remain at the mercy of the buyer. 


Business Benefits of Invoice Factoring 

Invoice factoring surely gives you a significant edge as a supplier. Here is what you can look forward too

1. More Control 

Since the supplier initiates factoring, you will determine which invoices they will factor and by when depending on their cash flow needs. The supplier determines which invoices they will factor with factoring and when based on their cash flow needs. Thus, suppliers stay in complete control, know the costs before time, and easily factor in. 

2. Go Paperless 

Paper-based invoicing can be labour-intensive. You will need to make multiple copies and also get it verified. However, with e-invoicing and e-payment options, factoring will be more streamlined and easy to achieve. Moreover, online vendor portals have made it easy for factors to view and verify invoices. 

3. Manage Your Cash Flow 

Usually, factoring clients are invited to early payment programs. These usually require them to make a few clicks, and a discounted payment is sent to them in seven days as compared to the standard 30-day term. 

So, if your customers invite you to participate in such programs, ask yourself if it is worth it? While you might get paid sooner, what’s the promise that they will be available on a regular basis. 


You only determine which invoices you will factor in and when with factoring. Besides, you deal with one factor rather than dealing with multiple processes, platforms, and customers. So, the choice is yours; invoice factoring is highly recommended if you wish to keep your cash flow in your control! 


Wrapping Up 

This was all about factoring in supply chain management. Yes, invoice factoring is here to stay for the long haul. So, take your supply chain operations a notch higher by streamlining your finances and unlocking the potential of accurate and trustworthy business data. If you wish to know more, don’t forget to schedule a call with our experts! 


Labels:

Comments

Post a Comment

Popular posts from this blog

Guide to accounts payable forecasting

  Both small enterprises and huge corporations rely on balance sheet forecasting for efficient financial planning also referred as financial modeling. Estimating your future earnings and spending gives you valuable financial planning information and protects your company from potential disruptions and seasonality, among other things. Accounts payable is one of the most significant balance sheet components. Accounts payable, which represent your short-term liabilities typically compensated off within a year, must be accurately forecasted to ensure not only the accuracy of your financial statements but also a realistic view of the amount of funds you have available for growth and development in addition to paying your debts. One of the main advantages of implementing AP automation from Skyscend is that it frees up your accountants' time so they can concentrate on more crucial work, lowers the possibility of error, and strengthens business ties. What is Accounts Payable (AP)?
Post a Comment
Read more

How much do factoring invoices cost?

There are several financing and funding processes involved in businesses to keep them afloat. The finance team has to be constantly on their toes to make sure the working capital is flowing right, and the business is supported well. Among many such finance solutions comes the invoice factoring .   What is voice factoring? Invoice factoring is one such way for the businesses to raise money by selling their outstanding invoices to a factoring company at a discount. It is a type of invoice financing where a third-party lender (a factoring company) lends cash against the customer invoices which are yet to be paid. This arrangement helps the business to receive most of the invoice cash immediately rather than waiting for weeks or months to get paid. The amount of funds available or lent is typically determined as a percentage of the outstanding sales ledger or debtor book. However, this may be restricted by a specific condition, such as limiting exposure to a single large customer.
Post a Comment
Read more

Reducing Operating Costs: How AP Automation Helps Get the Job Done

  The current times are questioning industries these days, with growing interest rates, inflation, and tension in the air. The profitable news: Enterprises accomplished have to just tolerate their lot and wait for the worst. Opportunities remain, with characters having all types of strategies at their disposal to reduce operating costs and improve profits.   Invoice processing software came with a spectrum of strategies for reducing operating costs, numerous of them geared around one of the secret weapons of the business world: Operating accounts payable industrialization invoices management and related tools.     What is accounts payable automation? As the name suggests, accounts payable automation or AP automation refers to tools or processes that eliminate manual aspects of accounts payable and instead automate them. Specifically, AP automation lets you submit and approve purchase orders and invoices digitally, rather than dropping them physically in in-trays. Some solut
Post a Comment
Read more