Supply Chain Finance Vs Invoice Discounting

Be it a small or large business, cash flow management is a must for a rapidly growing business environment. Platforms such as TReDS and invoice discounting are some of the most effective means of achieving that. Both of these methods are well known cash flow optimisers. Both are designed for different purposes but they offer flexibility in managing working capital purposes, and their operation is different in nature. 

TReDS is a buyer-led system where supplier invoices are allowed to get early payments. This therefore increases the liquidity for both the buyer and the seller and brings both of them closer to financial terms. Invoice discounting also helps to smoothen cash flows but under a different operating model.. SCF is especially useful for large supply chains since it boosts the cash flow by pushing the payment terms forward but still pays suppliers much earlier.

SCF is especially useful for large supply chains since it boosts the cash flow by pushing the payment terms forward but still pays suppliers much earlier.

Free business cash locked up in unpaid invoices is made available through invoice discounting. Companies selling these invoices to financial institutions at a discounted price will find quick realization of cash flow. Invoice discounting is more suppliers’ driven than SCF. More immediately accessible funds are realized than would be delayed until the due date of the invoice under SCF.

With platforms like TReDS in place, both SCF and invoice discounting are made easy. Platforms such as TReDS (Trade Receivables Discounting System) are innovated to enable the efficient discounting of invoices both through SCF and invoice discounting. TReDS connects buyers, sellers, and financiers on a single platform to offer an invoice at competitive rates. It thus enhances overall cash flow management among businesses involved while permitting smoother trade relations to continue.

Hence, the question of the sort, in summary is: While SCF helps a business to increase buyer-supplier relationships due to early payments, invoice discounting helps it mobilize quick cash by making use of unpaid invoices. Both are helpful for working capital management when integrating with platforms such as TReDS.

What is Supply Chain Finance?

Supply Chain Finance (SCF), sometimes also called supplier financing or reverse factoring, is a method of cash-flow optimization that allows the payment period extended by a firm beyond what would otherwise be expected from a supplier while still enabling the supplier to receive payment earlier than when due to him. A financial intermediary, such as a bank, advances to the supplier the funds paid for by the buyer before its payment due date.

SCF makes use of the credit strength of the buyer in order to extend payment terms with its suppliers. This way, suppliers get paid early without destroying their cash flow, and the buyer manages to delay its payments in order to get hold of its own cash flow. 

How Does SCF Work?

It’s an Agreement Between Buyer and Supplier:

The buyer and supplier agree on an invoice that will be paid within a specific time limit.

SCF Program Establishment: The buyer opens an SCF program with a financial institution.

Early Pay-out to Supplier The SCF provider pays the supplier earlier, while the buyer pays according to their original terms.

Advantages of Supply Chain Finance:

1. Cash Flow Enhancement Buyers delay their payments, ensure suppliers are paid in advance, and maximize cash flow.
2. Reducing Costs Suppliers enjoy better financing costs as the credit rating from the buyers is used.
3. Stronger Relations with Suppliers: Suppliers who receive on-time payments are likely to provide attractive prices and have good relations.
4. Invoice discounting helps the firm advance funds against its outstanding invoices. This type of finance, which is Short-Term, uses the company’s accounts receivable by unlocking funds that would be tied up for 30 to 90 days awaiting receipt from customers.

Here, the loan is based on the creditworthiness of the seller in case of invoice discounting. SCF, however, is more credit standing-based on the buyer.

How Invoice Discounting Works?

1. The sellers issue an invoice to the buyers.
2. Discounting Agreement: The sellers then submit the invoice to the finance company for discounting.
3. Advance Payment: The financiers pay the sellers 80-90% of the invoice amount.
4. Final Payment: After the buyer pays the invoice, the seller gets the balance, minus fees and interest,

Benefits of Invoice Discounting:

Companies can access funds from outstanding invoices even before customers pay them.

Confidentiality: It is basically a confidential scheme whereby the customers are not aware that

invoice discounting is being used by the supplier.

Flexibility : Sellers can choose which invoices to discount. That way, a seller has full control over its cash flows and can dictate when to generate liquidity and when not to.

TReDS and SCF and Invoice Discounting:

TReDS is an electronic platform in India that aims to speed up payments between small and medium-sized enterprises and their buyers. It acts as an auction marketplace where companies can raise bids from financiers who can offer the best rates for payments before the due dates. TReDS makes SCF and invoice discounting easier through increased transparency for the business and greater access to working capital. 

Differences Between SCF and Invoice Discounting:

Buyer-friendly vs. Supplier-friendly:

SCF is a credit invoice finance product from the buyer’s side, whereas invoice discounting is an invoice finance product from the supplier’s side. 

Cost: SCF happens to be cheaper in terms of finance because it is on the buyer’s credit, but

Invoice Discounting is expensive because it depends on the supplier’s credit.

Control:

SCF offers the buyer higher control over the payment process. Invoice Discounting allows the supplier to pick the invoices that are to be discounted.

Privacy: In most cases, invoice discounting is a private arrangement. SCF is relatively open since the buyer, financier, and supplier agreement must be transparent.

Which Option Would Work for Your Business?

The appropriate choice would depend upon your needs :

The SCF is a better option for large buyers to get better supplier relations and manage their cash flow.

Invoice discounts are good for suppliers looking for quick cash without affecting customer relationships.

Platforms like TReDS, which offer early payment marketplaces with transparency to small and medium businesses, further facilitate this option.

Conclusion:

Supply chain finance and invoice discounting are often used for cash flow management. Differences between them and how TReDS may facilitate such decisions will see businesses acting wisely and keeping their businesses running smoothly. Whether the business is a buyer or a supplier, the right choice will help to strengthen partnerships for better cash flows, improve your bottom lines, and push the success curve up for your business