The Difference: SCF vs Factoring
SCF and factoring are two different solutions. Sometimes, a CFO tell us (s)he doesn’t need SCF, since the company already has a factoring facility in place. While both solutions solve the same problem (optimizing working capital), they are very different form each other. Let’s see how.
Before we get to the point — let’s make sure we’re aligned in terms of terminology, using ABC Company as an example.
Payables vs Receivables, AP vs AR
ABC Company has vendors and customers.
When a vendor of ABC invoices it, this invoice becomes an ABC payable.
When ABC invoices a customer, that invoice becomes an ABC receivable.
The ‘Accounts Payable’ (AP) metric describes how much ABC Company owes its vendors, at a given point in time.
The ‘Accounts Receivable’ (AR) metric describes how much ABC Company is owed by its customer, at that point in time.
The impact of AP and AR on a company’s working capital
Both the AP and the AR, impact ABC’s working capital. The more ABC Company is owed by its customers, the more it needs to find capital somehow to bridge the gap until it gets paid by them. On the other end, the more it can hold on to its cash before paying vendors, the better. Here’s the equation that connects the three:
This is of course why companies try to collect as quickly as possible from customers, and pay as late as possible to vendors…
The impact of factoring and SCF on a company’s working capital
Both factoring and SCF are solutions that help companies optimize their working capital. However, these two solutions solve the problem from opposite directions.
What happens when ABC does factoring? Factoring allows ABC Company to get most of the amount a customer owes it, quicker than the invoice maturity date. If a $10,000 invoice is to be paid by a customer in 90 days, the factoring provider (a bank, for instance) would buy the invoice from ABC, and transfer it the $10,000 amount in exchange for a fee (we’ve simplified things a little bit here, for clarity).
Therefore, factoring allows ABC to collect quicker (albeit a discounted amount), by that reducing ABC’s AR, and as a result — ABC’s working capital.
What happens when ABC does SCF? SCF is a systematic way of offer factoring to the vendors of ABC, only for invoices that were issued to ABC. So, ABC’s vendors are able to have their ABC invoices paid early by Quartix. This is why SCF is sometimes called ‘reverse-factoring’. SCF boosts ABC’s bargaining power with vendors (since vendors may collect very quickly), allowing it to negotiate longer payment terms. More on that — here.
Therefore, SCF allows ABC to pay later, by that increasing ABC’s AP, and as a result — reducing ABC’s working capital.
Key similarities
1. Both solutions work with invoices as the underlying asset.
2. Both solutions help ABC optimize its working capital — one from the receivable / AR side (factoring), the other from the payable / AP side (SCF).
Key differences
Here are the key differences between factoring and SCF, from ABC’s point of view:
Additionally, SCF has an income component — a rebate — that can boost ABC’s Ebitda. Here is how it works. Here is how you can calculate its impact on your company.
Summary
SCF and factoring relate to two different types of invoices — those that are issued to ABC, and those ABC issues itself.
Factoring is a direct solution to optimize working capital. It allows ABC Company to discount its receivables with the help of a bank, in order to collect quicker.
SCF is an indirect solution to optimize working capital. It allows ABC Company to boost its bargaining power vis-à-vis its vendors, by providing vendors optional factoring for invoices they’ve issued ABC. SCF also has a rebate component, which provides an Ebitda value, in addition to a working capital one.
Today, SCF is a Fortune 500 best practice, that Quartix makes available to the middle-market.
