“One vs. many” is a phrase we at Artis often use when describing the difference between Reverse Factoring, a.k.a. Supply Chain Financing (SCF), and Factoring. The “one” refers to Supply Chain Financing and the “many” refers to Factoring. This statement may make it seem as though Supply Chain Financing and Factoring are at odds with one another; however, quite the opposite is true. The two are, in fact, very complimentary – frequently utilized together to optimize profitability and efficiency. Let’s take a look at our notion of “one vs. many”.
Factoring is a high-risk endeavor requiring intensive management, administration, monitoring, business acumen, savvy and skill. One client will typically have many debtors – each requiring underwriting. Further, one client will submit many invoices. Most invoices submitted by the factoring client require verification in order to ensure the legitimacy of the invoice as well as to avoid potential disputes. Underwriting debtors is a skill, an art, and a highly technical process. Verifying invoices is time-consuming, laborious and expensive. These tasks, which are cumbersome and perpetual, are performed for the revenue of one client.
Supply Chain Financing centers around the Buyer – the Supply Chain Financing client. One buyer has many suppliers (some of whom may be factoring – more on that in another time). A Supply Chain Financing program only requires a lender to underwrite one buyer to fund many of its suppliers. The Underwritten Buyer is essentially a Factoring Debtor, an entity well-known to Factors. If a Factor can successfully underwrite many hundreds of Debtors, logically, it follows that the Factor can successfully underwrite one Buyer, and thus, most probably underwrite many “ones” of Buyers. Additionally, in the Supply Chain Finance flow, the Buyer must approve the invoice for payment before the Lender will fund. Invoice approval by the Buyer replaces invoice verification by the Funder.
Why is this significant? No more invoice verification and no more invoice disputes. The laborious task of verifying many invoices goes to none (not even one). There is a big bonus as well, the one buyer has many suppliers! What does that mean? Well, think of one of your current debtors, and then think about their entire accounts payable balance and all the suppliers that make up that balance – that is your potential lending base. By underwriting one buyer, you have access to reverse factor a significant portion of their accounts payable.
Factoring = one client (underwrite one) + many debtors (underwrite many) + invoice verification + disputes = high yields + high operating costs
SCF = one buyer (underwrite one) + many suppliers (underwrite NONE) – invoice verification – disputes = high yields + low operating costs
As you can see in the equations above SCF is truly addition by subtraction. With Supply Chain Financing, there is less administration, less underwriting, less work and more profit.
Supply Chain Finance = Less is More!
A founder of Artis Trade Systems, Jamie Clemons, CPA, started his career working in business risk consulting at Protiviti after attending the University of Arizona on an academic scholarship where he graduated Summa Cum Laude with dual degrees in Finance and Accounting. During his time in consulting, Jamie served clients in various industries including Airline, Banking, Software, Pharmaceutical, and Education among others.