Buyer-led Supply Chain Finance solutions: How do they differ?

Invoices can be financed in a number of ways: factoring, invoice discounting, receivables discounting, reverse factoring, payables finance, dynamic discounting, etc. To navigate between these solutions, it’s important to distinguish their main features:

• Who manages the process? Does the buyer or the supplier initiate the credit facility with the bank? How is data exchange organised between buyers, suppliers and the bank?
• Ultimate credit risk: Does the invoice assignment take place with or without recourse to the supplier? In some cases, credit risk lies with the buyer and financing can be extended to suppliers without recourse. In other instances, credit risk is against the supplier, with invoices serving as collateral;
• How is the financing fee formulated? In invoice finance, the service fee is usually based on the method of discounting. The financing fee is deducted from the amount of the invoice according to the expected financing period, and is not added as an interest fee to the loan amount. The fee for financed invoices is usually calculated as a monthly discount rate, rather than at annual interest rates.

In this article, we will discuss buyer-driven supplier finance solutions, which include reverse factoring (no recourse to the supplier), buyer-initiated factoring (with recourse to the supplier), and dynamic discounting.

In reverse factoring (a.k.a. payables finance or Supply Chain Finance), invoices are financed by one or more creditors. In addition to providing accounts payable data, the buyer also undertakes an irrevocable responsibility to pay the creditor when the invoice matures. This type of financing is provided without recourse to the supplier.

Buyer-initiated factoring is a hybrid structure in which the buyer establishes credit terms and data exchange with the creditor, while credit is provided to the supplier. It streamlines data exchange between the buyer’s accounting system and the creditor’s core banking system. The buyer does not take on a binding payment obligation, so the supplier must be bankable in its own right.

In the case of dynamic discounting, the buyer offers the supplier payment in advance within the agreed payment period in exchange for a discount. In this solution, the creditor is not involved - this means that it can be used as long as the buyer is cash-rich. Once the invoice is settled, all risks and obligations are extinguished.

In summary, each buyer-led instrument can serve as a strong supply chain management or working capital tool depending on the buyer’s cash position and strategic objectives. For buyers who want to improve their bargaining power across the supply chain, reverse factoring represents an opportunity to leverage supplier relations regardless of its own liquidity. Dynamic discounting is suitable for cash-rich buyers who are looking to earn additional revenue from discounting their payables. Buyer-initiated factoring fits well in situations where the debtor does not want to utilize its risk limits in the banking market or needs to leave ample room for set-offs. Ultimately, a mix of different instruments may be the best approach to pursue various objectives at the same time.