How is supply chain finance different from invoice discounting and factoring?
From the borrower’s perspective- factoring and invoice discounting look up the supply chain to a company’s customers and use these debts as security. Supply chain finance on the other hand looks down the supply chain to the suppliers.
Whilst some providers of supply chain finance try to dress it up as something else, supply chain finance is a form of working capital finance and provides liquidity in a similar way to an overdraft. The main difference being that funds are only used to pay suppliers.
From the security perspective- there is obviously no advantage for a lender to take security over a supplier invoice. If the borrower does not honor the debt, the supplier is unlikely to step in and help! Rather, supply chain finance lenders take comfort from the overall strength of the borrower. A position that is often backed up by credit insurance.