Invoice Finance vs. Supply Chain Finance: Choosing the Right Funding Solution for Your Business

Updated 3rd August 2023

Small and medium businesses can sometimes find themselves struggling to access steady and reliable cash flow to fund day-to-day operations or to support growth.

Two effective financial solutions for such working capital problems include Invoice Finance and Supply Chain Finance. While both facilities come with their own advantages and disadvantages, each business should consider the specifics of their own requirements and circumstances when determining which solution is right for them.

In this guide, we’ll compare both these financial options to help you find the right source of funding to fuel your business’s success.

Invoice Finance vs Supply Chain Finance

What is Invoice Finance?

Invoice Finance is a flexible and quick funding solution that allows businesses to access the locked up value in their unpaid invoices. 

Instead of having to wait the (often extended) terms of 30 days or more, businesses can access a line of credit for a percentage of the amount due to them from a financial company. This allows them to access immediate funds in exchange for a relatively small administrative and processing fee.

What is Supply Chain Finance?

Supply Chain Finance facilitates the entire supply chain by providing early payment to suppliers. In this alternate funding arrangement, the finance provider works with the buyer and the supplier, which in this instance is you and your business, to provide discounted but immediate payment to the supplier on behalf of the buyer. The appeal of Supply Chain finance is immediate invoice settling for the supplier whilst offering extended payment terms with no negative business relationship consequences for the buyer.

Which is better?

Ultimately, the right funding solution for you will depend on your situation. To help give you a stronger understanding, here are pros and cons to take into consideration.

Pros of Invoice Finance

1. Quick and Simple Access

Invoice Finance offers near immediate cash flow relief to help businesses fund short term working capital problems or help ensure agility in capitalising on growth opportunities.

2. Minimal Risk

The unpaid invoices serve as the collateral with Invoice Finance meaning that there is no need for property to be put up as security. This substantially lowers the risk associated with the solution.

3. Flexibility

Unlike more traditional forms of business loans and finance solutions, Invoice Finance is inherently flexible and allows the business to maintain control over the amount of funding being accessed.

Cons of Invoice Finance

1. Cost

There is a cost to Invoice Finance in the form of the fees that are deducted from the overall cash loan. This fee can be higher compared to traditional bank loans and similar funding methods.

2. Confidentiality

Depending on the type of Invoice Finance agreement, your customers may be aware of your funding arrangement. There are ways in which you can maintain confidentiality but remain responsible for accounts receivable and collections however. 

Pros of Supply Chain Finance

1. Strength Supplier Relationships

Supply Chain Finance allows quicker settling of invoices and immediate cash flow for the supplier. This ensures a mutually beneficial trade agreement and stronger relationships between buyer and supplier.

2. Low Cost

Supply Chain Finance is considered to be a more cost-effective form of business funding solution. With typically lower rates than traditional borrowing, it can be preferred by many businesses for that reason among others.

3. Mitigated Risk

By strengthening the entire supply chain, there is less risk associated with the trade and transactions between both businesses. This further promotes business and an ongoing relationship. 

Cons of Supply Chain Finance

1. Complexity

Compared to Invoice Finance in particular, implementing a Supply Chain Finance solution can be more complex operationally considering the multiple parties involved.

2. Eligibility

Smaller businesses with limited to no creditworthiness can find it more challenging to be eligible for a Supply Chain Finance arrangement. 

Which Finance Option to Choose for Your Business

It’s vital that you seek professional and bespoke financial advice from an experienced professional, such as the lending specialists here at ScotPac, before making a decision. However, as far as general advice goes, here’s our breakdown of what to consider.

When to choose Invoice Finance

• Do you need quick access to working capital to address some sort of financial need, operational problem, cash flow drought or growth opportunity?
• Do you have a significant number of outstanding invoices?
• Do you struggle with reliable, steady or efficient cash flow?
• Do you have strong customer relationships that wouldn’t be impacted by a non-confidential funding arrangement?

If you answered yes to all of the questions above, make sure to ask a ScotPac lending specialist about Invoice Finance today.

When to choose Supply Chain Finance

• Do you want/need to strengthen your relationships with suppliers?
• Do you want to invest in an ongoing supply chain with this particular supplier?
• Do you need a stable and efficient supply of goods or services for your day to day operations?
• Do you have the capacity to deal with the operational coordination required when dealing with buyers, suppliers and financial institutions?

ScotPac – finance and working capital solutions for SMEs Australia-wide

ScotPac is not just Australia and New Zealand’s largest non-banking financial lender, we’re also experts in providing a wide variety of services to small and medium sized businesses.

No matter how simple or complex a working capital solution you need, the breadth and depth of our capability will ensure your business gets the financial facility it needs to succeed. We view our clients as partners and not transactions, which is why our relationships last for many years and our track record for funding success is unparalleled.

So, whether Invoice Finance sounds like a solution fit-for-purpose for your business or Supply Chain Finance sounds like something your business should consider , make sure to contact us today for a no-cost, pressure-free consultation.