Oxygen Funding Financing Options

What’s The Difference Between Factoring and Supply Chain Finance?

No matter what type of business you’re running, there are often multiple financing options that you can consider to get capital for your business relatively quickly and get your cash flow back in great standing. 

Factoring and supply chain finance are both options that businesses take advantage of for this exact purpose. Factoring and supply chain finance allow businesses to receive necessary funding relatively quickly, though they’re used in very different ways. 

So what’s the difference between factoring and supply chain finance? In this post, we’ll take a look at both options, when to use them, and how to decide what’s right for your business. 

Factoring Invoices

What’s Factoring? 

It only makes sense to start by diving into factoring before we look at its reverse counterpart. 

Factoring is also commonly referred to as “invoice financing”. Factoring is a relatively straightforward financial transaction in which a business submits their unpaid customer invoices to a third-party company, who will pay around 80% of the invoice’s totals. Your customer will pay the third-party company, at which point they’ll remit the rest of the payment, minus any agreed-upon fees.

In most cases, businesses can opt to finance all of their invoices, or only select invoices for their choosing. This gives them control over how and when to utilize factoring for their benefit.

It’s common for businesses to have contracts with customers requiring they pay within thirty, sixty, or ninety-day periods, or perhaps even longer if they’re on extended payment plans. Waiting for those ninety-days to receive payment, however, can be difficult when you’re trying to stay on top of cash flow. The ability to receive early payment (even if not totally in full) frees up a lot of working capital to keep operations running as usual in the meantime. 

Vendor Procurement

What Is Supply Chain Finance? 

Supply chain finance is a type of financing in which a bank or third-party lender will pay a company’s invoices for them in advance in exchange for a discount. 

Instead of having the third-party finance the invoices to speed up the process of receiving a payment like typical factoring, here the ordering party uses funding from the supplier to finance their receivables in advance. The buyer will then pay the lender at an agreed-upon later date.

Here’s how it works. Imagine that you are a laptop manufacturer, and you’re sourcing multiple parts from different suppliers. You get the case from China, the screen from Italy, and the hard drive from Silicon Valley in California. After each piece is individually produced, it’s all shipped to you in Massachusetts for everything to be assembled, packaged, and mailed off to the distributor.

If, however, the supplier in Italy hits a snag with cash flow and is struggling to afford to continue with screen product, it can bring your entire operation to a grinding halt. In this case, they could submit their invoice to you to the third-party lender. The third-party grants them the capital needed to complete the task, and the company in Italy just has to pay a small fee. The supply chain overall keeps moving, allowing you to put together those computers on top and sending them out as promised. 

 

So What Exactly is the Difference? 

Factoring and supply chain finance can sound similar. Both allow businesses to receive payments in advance to keep their cash flow moving and their operations proceeding as expected. There are, however, a few key differences.

The first major difference is the timing. 

If we’re using the same example that we discussed above, you as the laptop manufacturer could use invoice factoring after you bill the distributor. The product has already been delivered, and you’re just waiting on the invoice to be paid.

Meanwhile, with supply chain finance, any of the suppliers who need to get parts to you (like Italy and their screens) could use supply chain finance in order to gain the capital needed to continue their operations and deliver their expected supply. Instead of the financing going to the single manufacturer, it’s going to suppliers so they can keep their supply chain moving. 

Financing Options for Business

Which is Right for My Business? 

When deciding whether you should look into factoring or supply chain finance, the biggest factor to focus on is where you are in the supply chain. Are you looking to gain working capital by receiving payment for invoices that have already been sent, or to receive advance payments that you need in order to deliver your promised products to the next person in the supply chain?

When you’re applying for both factoring and supply chain finance, it’s important to keep in mind that the third-party bank or financing company will want to assess their financial risk in offering you advanced payments. They’ll likely ask for the following when reviewing your initial application:

  • Current profit and loss statements 
  • Business credit history
  • Credit history of the customers you’ve sent the invoices to
  • Information on your current working capital
  • Financial forecasts and financial statements, which may include recent tax returns 

 

Final Thoughts 

There are plenty of financing options available for many businesses to choose from, and factoring and supply chain finance are two excellent alternative to traditional loans. 

Both allow you to receive upfront, non-debt financing that comes with lower fees than most loans, especially considering there aren’t high-cost interest rates. Once set up with a lender, they’re also typically quick and can potentially distribute payment within a few days. And, unlike loans which distribute lump-sum payments only once, you can utilize factoring and supply chain finance as you see fit to keep your cash flow in good condition.

Interested in learning more about factoring, or its preferred option, invoice financing, and supply chain financing? See how we can help you here. 

Factoring, Invoice Financing, Supply Chain Finance

    What our clients & partners are saying

    • “I want to express how impressed I am with your company. You are on top of everything we need to succeed. Knowing that we have a partner ready, willing and able to help us is well worth the price of admission!”

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    • “Oxygen Funding has been a great partner for our business. Oxygen has allowed us to work with larger companies that demand net 30 or longer terms with their vendors while keeping our cash flow positive.”

    • “If any business needs cash flow, they should call Oxygen Funding. They get my company cash for our invoices in less than 24 hours and handle all of the collections. Their staff explained the entire process and worked out a funding program specifically to meet our needs. Now I can focus my time on sales and running my company. Thanks Oxygen Funding, you guys are great!”

    • “We have been dealing with Oxygen Funding, Don D’Ambrosio, and Adam Lomax for approximately one year to date. Over the past 30 years we have been in business they are one of our top companies. To date we have dealt with, or currently have dealings with, over 350 companies. Professionalism, Expertise, Knowledge, Service, and Dependability are some of their attributes. I would recommend Oxygen Funding to anyone who is looking for a 5 star Accounts Receivable finance company.”

    • “As an Independent Contractor in today’s economic climate, its difficult when you have clients who pay in 60 days or more. Oxygen Funding has gone above and beyond funding: they personally oversaw and tailored the factoring setup process with my client. When it would normally take months to get paid, with Oxygen, invoice amount payments are over-nighted direct. The staff, including Don D’Ambrosio, have been very friendly and courteous every step along the way.”

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