Supplier Financing refers to the sum total of all methods that empower members of the supply chain to receive their dues before they’re supposed to, as per their agreements and understanding with their clients.
- Bill discounting, also known as Invoice Discounting, is an essential part of modern-day Supply Chain Finance that refers to the process by which corporates (buyers) give their suppliers the option to receive their dues earlier than the mutually pre-decided date, leading them to better, more affordable access to funds.
This enables a win-win situation for all parties involved in the Supply Chain: Suppliers gain access to funds at a significantly lower cost, while the buyer can access greater risk-free return on the excess cash and cash equivalents.
Modern Bill Discounting techniques leverage cutting-edge technologies to provide flexibility to the buyers and suppliers. Suppliers now have the option to get paid anytime between when the invoice gets the approval and the mutually agreed upon payment term, with a greater discount for the buyers the sooner the payment is made.
Simply put, Invoice Factoring, also known as Bill Factoring, refers to an arrangement wherein the seller sells its receivables to the financer in exchange for cash, minus a small discount, which will be the financer’s profit in the transaction. The Suppliers, thus, unlock their working capital, easing their liquidity crunch. On the other hand, the financer, upon maturity of the aforementioned receivables, collects the full amount from the buyer.
Reverse Factoring, as the name suggests, is closely related to Invoice Factoring, but with one key difference: A Reverse Factoring Solution is implemented by the buyer instead of the supplier. As a result, the terms of payment and the rate of interest are based upon the buyer’s relationship and credit history with the financer, thereby leading to an overall lower cost of funding when compared to Factoring.
Dynamic Discounting is a Supply Chain Finance Solution that allows unparalleled flexibility to the supplier to accept payment before it is due, in exchange for a small discount. Although it is very similar to early payment/prompt payment discounting, the difference primarily arises from the fact that it is ‘dynamic’: it allows the parties involved to choose the right balance between the discounts and the payment date, as the payment can be made anytime between when the invoice is approved and the due date.
- Both Reverse Factoring and Dynamic Discounting are prompt payment solutions designed to ease working capital management and by extension, liquidity for suppliers/sellers in a typical Supply Chain transaction.
However, the two methods are completely different from one another: let us understand how.
- Dynamic Discounting is all about giving suppliers/sellers flexibility in receiving their payment before it is due, in exchange for a small discount, with the added benefit of allowing suppliers to hit the right balance between the cost and the payment date. If a supplier were to choose an earlier payment due date, he/she would have to offer a greater discount to the buyer.
- Under Dynamic Discounting, it’s the buyers who are funding the supplier, and they can take advantage of automated early payment discounts the suppliers would offer in exchange for prompt payment. This allows buyers to improve their EBITDA, as they invest their excess cash to get a higher return than they otherwise would have.
- Reverse Factoring, however, is an early payment solution set up by the buyer and funded by a bank, who steps in to pay for the buyer, in exchange for a small fee, before the due date, and then collects the entire amount from the buyer on the due date, by investing in these low-risk alternate short-term instruments.
- Working Capital is an essential tool that enables organizations to utilise their current assets and liabilities in order to maintain cash flow required to meet their short term obligations.
Working Capital Management is extremely crucial for the company’s growth and expansion, as they need the aforementioned to meet their short term liabilities and obligations, finance their growth and expansion, mergers and acquisitions, in order to adapt to the ever-dynamic market.