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.