Invoice Finance vs Supply Chain Finance - What's the Difference?
Invoice finance is initiated by the supplier (you) to get paid faster. Supply chain finance is initiated by the buyer (your customer) to extend their payment terms while you get paid on time. Supply chain finance is typically cheaper but only available from large buyers who set up programmes with their bank.
| Invoice finance | Supply chain finance | |
|---|---|---|
| Initiated by | The supplier (you) | The buyer (your customer) |
| Priced on | Your creditworthiness | The buyer's creditworthiness (usually stronger) |
| Indicative cost | 1.5 to 3.5% discount fee plus 6 to 12% annual interest | 0.5 to 1.5% total |
| Coverage | Any or all customers, your choice | Only invoices to the buyer running the programme |
| Availability | Any UK limited company with B2B invoices over £5,000 | Only via buyers with £50m+ turnover who set up a programme |
Why This Matters
The distinction between invoice finance and supply chain finance matters because they solve the same cash flow problem from opposite ends, with dramatically different costs and control. Invoice finance lets you unlock 80-90% of unpaid invoices within 24 hours, but you pay 1.5-3.5% of invoice value plus interest.
Supply chain finance (also called reverse factoring) is cheaper, often 0.5-1.5%, because it's bank-funded against your customer's credit rating, not yours. As an illustration, a manufacturer supplying a national supermarket might pay around 1.2% through the supermarket's programme, against nearer 2.8% for selective invoice finance on the same invoices.
The catch: you can't initiate supply chain finance yourself. Only large corporates with procurement clout set up these programmes, typically through their relationship banks. If your biggest customer is a FTSE 100 company, you might already have access without knowing it. If you sell to 200 small businesses, invoice finance is your only option.
Key Points
- Invoice finance is supplier-initiated: you choose which invoices to fund, control the facility, and can use it across all customers. You typically access 80-90% of invoice value within 24 hours.
- Supply chain finance is buyer-initiated: your customer sets up a programme with their bank or a finance platform, then invites suppliers to register. You can't demand it or control timing.
- Cost difference is substantial: invoice finance charges 1.5-3.5% discount fees plus 6-12% annual interest on drawn funds. Supply chain finance typically costs 0.5-1.5% total because it's priced on the buyer's creditworthiness, which is usually stronger than yours.
- Supply chain finance preserves your balance sheet: the debt sits with the bank or platform, not as a liability on your accounts. Invoice finance creates a borrowing relationship that appears in financial statements (except true non-recourse factoring).
- Only a small minority of UK businesses have access to supply chain finance because it requires customers with £50m+ turnover who choose to establish programmes. Invoice finance is available to any UK limited company with B2B invoices over £5,000.
- Invoice finance offers flexibility: you can fund invoices from Customer A on Monday and Customer B on Friday. Supply chain finance only covers invoices to the specific buyer running the programme.
- Payment terms differ: with invoice finance you still chase payment from customers (unless you use factoring). With supply chain finance, the buyer's bank pays you early, then collects from the buyer at the original due date, so your customer relationship is unaffected.
Illustrative Example
Hypothetical: a Leeds packaging supplier with £3.2m turnover has two major customers: a local restaurant chain paying £40,000 monthly on 30-day terms, and a national supermarket paying £180,000 monthly on 75-day terms. The restaurant chain isn't large enough to offer supply chain finance.
The supplier registers for the supermarket's existing supply chain finance programme, run through the supermarket's bank, paying 1.1% to get paid on day 10 instead of day 75 (saving 65 days of cash tied up). For the restaurant invoices, they set up selective invoice finance with an independent provider at a 2.6% fee plus 8% annual interest on an 85% advance, drawing funds only when needed.
Monthly cost: roughly £2,000 for the supermarket invoices and about £1,250 for the restaurant invoices. Funding the supermarket invoices through invoice finance on the same terms would cost roughly £7,200 a month instead of £2,000.
Common Pitfalls
- Assuming supply chain finance is available to you: even if your customer is large, they must choose to establish a programme. A supplier to a multinational has no automatic right to participate, they wait for an invitation that may never come.
- Treating supply chain finance as 'free money': while cheaper than invoice finance, the 0.5-1.5% still compounds. A supplier funding £500,000 of invoices monthly pays £30,000-£90,000 a year, which can exceed the profit margin on some contracts.
- Not checking if you already have access: many suppliers to large corporates don't realise programmes exist. Check your customer's supplier portal or ask your account manager directly. Major retailers, utilities, and FTSE 100 manufacturers often run programmes without proactive communication.
- Relying solely on supply chain finance: if your major customer cancels the programme or you lose that contract, your working capital solution disappears overnight. Invoice finance provides backup flexibility across your entire ledger.
- Confusing supply chain finance with dynamic discounting: some large buyers offer early payment discounts (you accept 98p per £1 to get paid in 10 days instead of 60). That's not supply chain finance, it's simply a commercial discount that hits your margin directly.
What to Do Next
- Audit your top 10 customers by revenue: identify any with £50m+ turnover or recognisable corporate names (supermarkets, utilities, NHS trusts, local authorities). Contact their procurement or supplier finance team to ask if they operate a supply chain finance programme.
- Calculate your actual funding need: if 80% of invoices are to small businesses and 20% to one large corporate, invoice finance might still be your primary solution with supply chain finance as a supplement. Get quotes from Bibby Financial Services, Close Brothers, or Ultimate Finance for the invoice finance portion.
- If you have no large customers, focus entirely on invoice finance: compare confidential invoice discounting (you control credit control, customer doesn't know) versus factoring (provider chases payment). Request proposals from at least three providers including Aldermore, IGF Invoice Finance, and Novuna Business Finance, specifying your turnover, debtor days, and whether you want whole ledger or selective funding.
Related Questions
Can I use both invoice finance and supply chain finance at the same time?
Yes, and many suppliers do. You might use your customer's supply chain finance programme for a major retailer (cheaper, faster) while funding other invoices through selective invoice finance. The invoice finance provider will exclude invoices already funded via the programme. Most providers can accommodate this kind of mixed arrangement if you tell them up front.
Does supply chain finance damage my relationship with customers?
No. Supply chain finance is transparent and buyer-endorsed: your customer actively chose to establish the programme, often to support their supply chain. It is viewed as collaborative. Large buyers prefer suppliers using their programmes because it reduces supply chain risk.
What happens if the customer running the supply chain finance programme goes bust?
You face the same credit risk as normal trading. If you have already been paid early by the bank and the customer then fails, that is the bank's exposure. If the customer collapses before the invoice is funded, the programme likely freezes and you are an unsecured creditor for the original invoice. This is why funding diverse smaller customers via invoice finance can spread risk.
Founder & Managing Director, Muswell Rose, founder and PSC of Best Business Loans Ltd
Adam is the founder and managing director of Muswell Rose and a founder of Best Business Loans Ltd, the company behind Market Invoice. He spent over three years as managing director of Penny, a UK invoice finance business, and his career runs through insurance, mortgages, commercial finance and fintech lending. He writes the Market Invoice library.
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