Why businesses finance unpaid invoices
A business may have completed work and issued an invoice but still need cash to continue operating.
For example:
A supplier delivers R200,000 of products to a large customer.
The invoice is valid, but the customer will pay in 60 days.
The supplier needs money now to purchase stock for the next order.
Invoice financing and supply chain finance are two ways of potentially accessing money earlier than the normal customer payment date.
They are not free money. The business must understand the fees, repayment obligations and contractual arrangements.
What is invoice factoring?
Invoice factoring is a financing arrangement where a business sells or assigns eligible customer invoices to a finance provider.
The provider advances an agreed portion of the invoice value and collects payment from the customer under the arrangement.
Example:
| Description | Amount |
|---|---|
| Customer invoice | R200,000 |
| Illustrative advance at 80% | R160,000 |
| Remaining amount | R40,000 |
| Provider fees and deductions | According to agreement |
The business receives R160,000 earlier, subject to the provider’s terms.
The remaining amount is settled after customer payment and deductions are applied.
What is supply chain finance?
Supply chain finance is usually arranged through a large buyer’s supplier programme.
The buyer approves the supplier’s invoice, and an approved finance provider offers early payment to the supplier.
The finance provider assesses the buyer’s payment obligation, which may allow the supplier to access funding on terms linked to the buyer’s creditworthiness.
This can be attractive to smaller suppliers working with established corporates.
The difference between the two options
| Feature | Invoice factoring | Supply chain finance |
|---|---|---|
| Who initiates it? | Usually the supplier | Usually the buyer |
| Main relationship | Supplier and finance provider | Buyer, supplier and finance provider |
| Basis of financing | Eligible receivables | Buyer-approved supplier invoice |
| Customer involvement | May be notified or involved | Buyer is central to the programme |
| Availability | Depends on provider and invoice eligibility | Depends on whether the buyer has a programme |
| Cost | Depends on invoice risk, term and provider | May reflect the buyer’s creditworthiness |
The precise legal and financial structure varies by provider. Some arrangements are with recourse and others may be structured differently.
Which option should your business consider?
Consider invoice factoring when:
- Your customers have acceptable credit profiles.
- You regularly issue eligible invoices.
- Your business needs to access money before customers pay.
- Your customers do not offer a supply chain finance programme.
Consider supply chain finance when:
- You supply a large corporate or participating buyer.
- Your invoice has been approved.
- The buyer has an established supplier finance programme.
- The offered cost is lower or otherwise more suitable than alternative funding.
Questions to ask finance providers
Before accepting an offer, ask:
- What percentage of the invoice will be advanced?
- What is the total cost of the financing?
- Are there monthly or administration fees?
- Who is responsible for collecting payment?
- Does the customer need to be notified?
- What happens if the customer pays late?
- What happens if an invoice is disputed?
- Is the agreement with recourse?
- Are there minimum invoice amounts?
- Are there restrictions on eligible customers?
- Can the facility be used repeatedly?
- What are the early-settlement conditions?
Calculate the effective cost
Do not compare finance providers only by the percentage they advance.
Compare the total cost of receiving the money early.
For example, if a provider advances R160,000 against a R200,000 invoice, calculate all fees and deductions to establish how much cash the business actually receives and how much it ultimately gives up.
Then compare that cost with:
- The profit margin on the order.
- The cost of delaying supplier payments.
- The cost of missing another order.
- The cost of alternative finance.
Important risks to understand
Customer disputes
If a customer disputes an invoice, the finance provider may delay payment or require the business to resolve the issue.
Recourse obligations
Some agreements require the business to repay the advance if the customer does not pay.
Concentration risk
Financing invoices from one large customer may create dependency on that customer.
Fees
Monthly charges can become expensive when invoices remain unpaid for long periods.
Contract restrictions
Check whether your existing customer agreements allow invoice assignment or financing.
Frequently asked questions
Some providers work with SMEs, subject to invoice quality, customer creditworthiness and minimum requirements.
Some providers may consider government receivables, but the department, contract, invoice approval and payment arrangements matter.
Usually not. The buyer’s participation is central to a buyer-led supply chain finance programme.
No. Factoring is based on receivables and the arrangement may involve selling or assigning invoices. A conventional loan creates a borrowing obligation under different terms.
Can a small business use invoice factoring?
Can government invoices be financed?
Can I use supply chain finance without my customer?
Is invoice factoring the same as a normal business loan?
Your next action
Contact your largest customer and ask whether they offer a supplier finance or early-payment programme. If they do not, obtain quotations from at least two invoice-finance providers and compare their total costs.