18 MAY 2016
Xelix is a software tool that enables buyers to self-fund early settlement discount across their entire supply chain, with minimal hassle.
Supply Chain Finance is commonly used as an umbrella term that covers a broad range of financing activities. Some of these activities are buyer-led, whilst others are supplier-led. Some of these activities are bank-funded, whilst others are funded by alternative lenders or the buyers themselves. To complicate matters, Supply Chain Finance is also commonly used to describe the specific activity of Reverse Factoring, with the terms used interchangeably and often incorrectly.
But fear not, our fool proof Jargon Buster should help to clarify the different financing activities commonly used by buyers and supplier.
(AKA Supply Chain Finance, Approved Payables Finance)
Reverse Factoring involves three parties - the buyer, their suppliers & an external financier. It is typically initiated by the buyer as a way to reduce the risk of insolvency within their supply chain. Suppliers can elect to receive early payment on their invoices, funded by the financier, at cheaper rates than they could access themselves. In this scenario, suppliers are effectively borrowing against the credit rating of the larger, stronger buyer with whom the risk of default sits.
Aside from benefitting from a healthier supply chain, the buyer would usually take a share of the bank’s margin, or benefit from extended payment terms. Whilst banks have an overwhelming majority of the reverse factoring market, new entrants have emerged leveraging technology platforms and alternative sources of finance.
(AKA Accounts Receivable Financing, Accounts Receivable Factoring, Invoice Factoring)
Factoring is a form of Asset Based Financing where a company is able to sell its invoices in return for immediate cash flow. It is a way for companies to alleviate their cash flow troubles when faced with long payment terms. Typically, the factor will take possession of the company’s sales ledger and collect the debt directly from the debtor. The company will receive c.80-90% of the invoice value up front, with the remainder transferred when the debt is received in full- minus the factor’s fees and interest charges.
(AKA Invoice Discounting)
Discreet Factoring is closely related to factoring, with the key difference that credit control remains within the business. As such, the factor does not collect the debt directly from the debtor. Businesses may prefer this discreet approach so as not to signal liquidity issues that could damage their customer relationships. There is some regional variation as to whether discreet factoring is considered a debt (loan securitised by invoices) or a sale of invoices akin to factoring.
(AKA Prompt Payment Discount, Early Payment)
Early Settlement Discount is the process where a buyer is able to capture discounts by paying their supplier invoices earlier than originally agreed. An example of a typical discount would be “2/10 net 30” - meaning the buyer is able to deduct 2% off the invoice value if payment is made within 10 days on a 30-day invoice. Whilst not uncommon in the UK, such discounts are more part of day-to-day business in mainland Europe, especially in Germany (Sconto), Holland (Korting), Italy (Abbuono) & France (Escompte).
Dynamic Discounting is a form of early settlement discount. Dynamic discounts are calculated on a sliding scale whereby the earlier the invoice is paid, the larger the discount on offer. Dynamic discounts incentivise buyers to pay their suppliers as early as possible, whilst at the same time giving buyers the ability to capture discounts at any point during the payment term. You can read more about dynamic discounting here.
Great! But where does Xelix fit in all this?
Glad you asked!
Xelix is a software tool that enables buyers to self-fund dynamic discounts across their entire supply chain, with minimal hassle.
We would love to show you how it works. Click below to get in touch.