How supply chain finance differs from invoice finance

March 10th, 2021

How is supply chain finance (aka reverse factoring) different from invoice finance?

Supply chain finance, also known as reverse factoring, is in the news at the moment as a large supply chain financier has been forced into administration. What is supply chain financing and how does it differ from invoice financing?

While supply chain finance allows SMEs to receive early payment of their invoices, it's quite different from invoice financing. We compare the two arrangements below.

What is supply chain financing?

With supply chain financing a buyer of goods or services engages a third party to pay the invoices owing to its suppliers upfront. In exchange for receiving early payment of their invoices, the supplier accepts a discount on the invoice amount owed.

For example, the supplier might receive $98 if the invoice is paid upfront instead of receiving the full $100 in 30, 60 or even 90 days. For some suppliers, this is a good option as it releases working capital that would otherwise be tied up in unpaid invoices.  That cash flow can be used to cover operating costs, buy inventory or invest in equipment. Taking advantage of an early payment discount offered by a customer also gives the supplier the benefit of not having to arrange financing themselves.

The benefit for the buyer of the goods or services is that they can retain the cash payable to their suppliers for longer which preserves the buyer's own working capital. Depending on how the buyer structures the early payment option, it can also be marketed as advantageous too and supporting the cash flow of suppliers. 

The early payment discount taken by suppliers more than offsets the supply chain finance company's own financing costs while they wait for the buyer to pay the invoices.

What is invoice financing?

Invoice financing is similar to supply chain financing/reverse factoring in that it helps suppliers receive early payment for their outstanding invoices.  However, the mechanics are quite different. 

In contrast to supply chain financing, with invoice financing the supplier has a direct agreement with the invoice financing company.  Instead of requesting early payment at a discount from their customer, the supplier can use invoice financing to access funds using their unpaid invoices as security.

Because the invoice financing arrangement is made between the supplier and the invoice financing company, it can be tailored to their needs.

For example, business owners have the choice to use some or all of their accounts receivable to access funds whereas supply chain financing can be somewhat limiting as not all customers offer early payment options. 

Invoice financing is sometimes also called debtor financing.  It includes both invoice factoring and invoice discounting. Whilst there are subtle differences between the two, essentially they give businesses the opportunity to access cash flow from their unpaid invoices at the time of issue, rather than waiting until the buyer of your goods or services pay the invoices.

Compared to other types of business financing, invoice financing relies on the assets of the business, specifically the accounts receivable ledger.  In many instances, there is no need for real estate security or a long trading history. 

Which is better for my business? 

I'm a supplier to larger businesses

Suppliers to large businesses often have significant working capital tied up in unpaid invoices. They could benefit from releasing some of that cash flow for immediate use. Where customers offer suppliers early payment discounts, it's definitely worth considering as it can be a simple way to bring forward cash flow.

If your customers do offer early payment arrangements, it's important to correctly calculate the implied interest cost as it can sometimes work out to be a high annual interest rate. (It's best to speak to your accountant about how to do this correctly.)

If you do have customers that offer early payments and the discount works out to be reasonable, then it could be a great opportunity to bring forward the cash tied up in your invoices. Alternatively, if you're looking for more control and access to more cash flow using all of your invoices then invoice financing might be a better option.

I'm a customer that buys from smaller businesses

Effective management of working capital is important for all businesses.  Buyers of goods and services want to preserve their cash by making the most of the credit terms they are offered by their suppliers. 

Rather than pushing suppliers for long payment terms and then slow paying invoices after they are due, supply chain financing can be an effective solution that preserves cash flow while giving suppliers the option to be paid early.  Additionally, if you negotiate strongly with your supply chain financier, the early payment discount may be small enough for it to make sense for both you and your suppliers.


If you are a large business that has many suppliers and the terms agreed with the supply chain financier are favourable, supply chain financing could be a win-win for you and your suppliers. However, it's important to carefully balance providing a useful service to your suppliers against taking advantage of your power as a large buyer.

If you are a small business that acts predominantly as a supplier, the decision whether to take up supply chain financing or invoice financing should only be taken after careful consideration of your options.  Both arrangements have their pros and cons. 

If you're looking to release working capital from your unpaid invoices, you need to choose the option that you know will be best for your business.

Earlypay offers modern invoice financing facilities that help Aussie SMEs access cash flow from their outstanding invoices. If you would like to learn more about Earlypay's services, please visit us at, or speak to your BDM or Broker.

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If you'd like to learn how Earlypay's Invoice Finance & Equipment Finance can help you boost your working capital to fund growth or keep on top of day-to-day operations of your business, contact Earlypay's helpful team today on 1300 760 205, visit our sign-up form or contact [email protected].