One is priced on the buyer's credit and funds the whole invoice; the other is priced on your receivables and advances part of it. The headline rates hide most of the difference.
Supply chain finance is usually the cheaper of the two, because it is priced on the buyer's credit and finances the whole invoice, while factoring is priced on your receivables book and your standing as the factor's client, and advances only part of it. On an illustrative 4,200,000 invoice on 90-day terms, getting to cash through the buyer's programme costs 60,667 all in, against 99,382 through non-recourse factoring: 38,716 less, 12.6 per cent of the order's 306,600 operating margin. The gap is not the 1.40 points between the two headline rates; it is mostly the advance rate and the commission.
Worked in full in Trade Finance by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
The two products look alike from the supplier's side: an invoice goes in, cash comes out early, a bank waits for the buyer to pay. They differ in whose risk is priced, how much of the invoice is financed and when the money arrives. Supply chain finance (also called reverse factoring or approved payables finance) is set up by the buyer; the bank buys invoices the buyer has approved for payment, at a rate that reflects the buyer's credit. Factoring is set up by the supplier, priced on the supplier's receivables book and its standing as a client, even when the factor takes the buyer risk without recourse, and advances a percentage.
| Input | Supply chain finance | Factoring |
|---|---|---|
| Invoice | 4,200,000 | 4,200,000 |
| Payment terms from shipment | 90 days | 90 days |
| Recourse to the supplier for buyer default | None | None |
| Amount financed | 100% after approval | 85% advance |
| Funding date | Day 10, on buyer approval | Day 0 |
| Rate (base 4.30%) | Base + 1.20% = 5.50% | Base + 2.60% = 6.90% |
| Service commission | None | 0.60% of invoice |
| Supplier's own cost of funds for any gap | 8.00% | 8.00% |
To compare like with like, each route is costed as the price of turning the whole invoice into cash on the day of shipment. Whatever the financier does not fund, or funds late, the supplier carries itself at 8.00 per cent.
Days financed = 90 − 10 = 80
Discount = 4,200,000 × 5.50% × 80 ÷ 360 = 51,333; proceeds 4,148,667 on day 10
Supplier carries the invoice for the first 10 days: 4,200,000 × 8.00% × 10 ÷ 360 = 9,333
Total: 60,667. Effective rate on the cash received: 51,333 ÷ 4,148,667 × 360 ÷ 80 = 5.57%
In Excel: =B1*B2*(B3-B4)/360+B1*B5*B4/360 with the invoice in B1, the rate in B2, the terms in B3, the approval lag in B4 and your own rate in B5.
Advance = 85% × 4,200,000 = 3,570,000, for 90 days
Discount = 3,570,000 × 6.90% × 90 ÷ 360 = 61,582
Commission = 0.60% × 4,200,000 = 25,200
Residual 630,000 carried by the supplier: 630,000 × 8.00% × 90 ÷ 360 = 12,600
Total: 99,382. Effective rate on the cash advanced: 86,782 ÷ 3,570,000 × 360 ÷ 90 = 9.72%
| Route | Financier's charges | Supplier's own funding | Total | % of invoice | Margin left |
|---|---|---|---|---|---|
| Supply chain finance | 51,333 | 9,333 | 60,667 | 1.44% | 245,933 |
| Non-recourse factoring | 86,782 | 12,600 | 99,382 | 2.37% | 207,218 |
| Difference | 38,716 |
For the factoring route to match the programme, the buyer's programme would have to charge 9.65 per cent, base plus 5.35, on the 80 days it finances. That is 2.75 points above the factor's own rate: supply chain finance would stay cheaper even on a buyer rated somewhat below the supplier, because the full advance and the absence of a commission do most of the work.
| Days to buyer approval | Discount | Supplier's gap funding | Total SCF cost | Saving vs factoring |
|---|---|---|---|---|
| 5 | 54,542 | 4,667 | 59,208 | 40,174 |
| 10 | 51,333 | 9,333 | 60,667 | 38,716 |
| 20 | 44,917 | 18,667 | 63,583 | 35,799 |
| 30 | 38,500 | 28,000 | 66,500 | 32,882 |
| 45 | 28,875 | 42,000 | 70,875 | 28,508 |
| Buyer's SCF rate | Total SCF cost | Effective rate on cash |
|---|---|---|
| 4.90% | 55,067 | 4.95% |
| 5.50% | 60,667 | 5.57% |
| 6.30% | 68,133 | 6.39% |
| 7.30% | 77,467 | 7.42% |
The case to watch is the trade buyers often attach to a programme: join, and accept longer terms. If the buyer moves from 90 to 120 days, the bank finances 110 days and the discount rises to 70,583, for a total of 79,917. The supplier is still 19,466 better off than factoring at 90 days, but half the saving has gone to the buyer's working capital. That is the trade the buyer is accounting for on the other side, as set out in whether supply chain finance counts as debt.
Comparing the headline rates. 5.50 against 6.90 per cent suggests a gap of 1.40 points, about 13,067 on this invoice over the 80 days. The real gap is three times that, because the factor's rate applies to a partial advance, the commission is charged on the whole invoice whether or not it is advanced, and the residual 15 per cent still has to be funded somewhere. The effective rates on cash received, 5.57 and 9.72 per cent, are the honest comparison; the build-up for factoring alone is in the effective annual cost of invoice factoring.
Cost each route as the price of the whole invoice in cash on shipment day, including the days and the share the financier leaves to you. On a 4,200,000 order on 90-day terms, the buyer's programme costs 60,667 and factoring 99,382, a difference worth 12.6 per cent of the margin. The supplier cannot choose supply chain finance, since only the buyer can offer it, but when it is offered the answer is rarely close, unless the price of joining is a long stretch in terms. The order, the margin and every other route to payment are modelled in the free workbook for this case.
Usually, because reverse factoring is priced on the buyer's credit and funds 100 per cent of an approved invoice. On an illustrative 4,200,000 invoice at 90 days, it costs 60,667 including ten days the supplier funds itself before approval, against 99,382 for non-recourse factoring with an 85 per cent advance and a 0.60 per cent commission. Factoring only matches it if the programme charges 9.65 per cent.
Multiply the invoice by the discount rate and by the days from funding to the due date, over 360, then add the cost of funding the invoice yourself until the buyer approves it. On 4,200,000 at 5.50 per cent for 80 days the discount is 51,333; ten days of the supplier's own money at 8.00 per cent add 9,333, for 60,667, an effective 5.57 per cent on the cash received.
It can still pay, but the buyer takes much of the gain. In the illustrative case, moving from 90 to 120 days raises the supplier's supply chain finance cost from 60,667 to 79,917. That is still 19,466 cheaper than factoring at the original 90 days, but half the saving has been transferred to the buyer's working capital.
This article is one calculation from Trade Finance. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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