Invoice factoring and supply chain finance are both tools for unlocking cash tied up in trade receivables — but they work from opposite ends of the supply chain and serve very different purposes. Choosing the wrong one is a common and expensive mistake. This guide explains the difference, the costs, and the right use case for each.
What Is Traditional (Recourse) Factoring?
Traditional factoring — also called accounts receivable financing or invoice discounting — is initiated by the supplier (seller). You issue an invoice to your customer, then sell that invoice to a factor at a discount (typically 70–90% of face value upfront), receiving the remaining balance (minus fees) when your customer pays. The factoring company advances you cash against invoices you've already raised.
In recourse factoring, if your customer doesn't pay, you're on the hook — you buy the invoice back. In non-recourse factoring, the factor assumes credit risk, but charges significantly higher fees (typically 2–5% of invoice value). Most small business factoring in Australia, Canada, and the UK is recourse-based.
Traditional factoring is particularly useful for SMEs with strong debtors but slow-paying customers — construction subcontractors waiting 60–90 days, staffing agencies with net-45 terms, logistics companies with large retail clients.
What Is Reverse Factoring (Supply Chain Finance)?
Reverse factoring — also known as supply chain finance (SCF) or approved payables financing — is initiated by the buyer (your customer), not the supplier. The buyer sets up a platform with a financier. Suppliers then choose to receive early payment on approved invoices at a discount based on the buyer's credit rating (not their own). The buyer pays the financier at the standard invoice due date.
Because the financing cost is based on the creditworthiness of the large buyer (rather than the small supplier), reverse factoring typically offers significantly lower rates than traditional factoring — often 0.5–2% per annum versus 15–30% annualised for traditional factoring. The catch: the buyer must set up and operate the programme, which requires minimum invoice volumes and willingness to commit to supplier adoption.
Side-by-Side Comparison
| Traditional Factoring | Reverse Factoring (SCF) | |
|---|---|---|
| Initiated by | Supplier | Buyer |
| Credit basis | Supplier's debtor quality | Buyer's credit rating |
| Typical cost | 1.5–5% per invoice (15–30% annualised) | 0.5–2% per annum |
| Who benefits most | Supplier with slow-paying customers | Supplier of a large, creditworthy buyer |
| Setup required | Supplier contracts directly with factor | Buyer establishes platform; suppliers opt in |
| Invoice control | Supplier selects which invoices to factor | Buyer approves invoices; supplier selects timing |
| Relationship impact | Customers notified (in disclosed factoring) | Strengthens buyer-supplier relationship |
| Minimum volume | Low — works for SMEs | High — requires buyer commitment |
| Credit risk | Recourse to supplier (usually) | On buyer balance sheet |
Which Is Right for Your Business?
A Note on Disclosure
In disclosed (notification) factoring, your customers are notified that invoices have been assigned to a factoring company — payments go directly to the factor. In undisclosed (confidential invoice discounting), the arrangement is invisible to customers. Most SME factoring in Australia and Canada is disclosed. If customer relationships are sensitive, confidential invoice discounting is worth the slightly higher cost.
OAKRG works with factoring providers across manufacturing, construction, staffing, logistics, and resources — including both traditional disclosed factoring and reverse factoring platforms linked to major buyers. If you're unsure which structure applies to your business, a short consultation usually resolves it within one conversation.
Not Sure Which Structure Fits?
OAKRG works with businesses across mining, data centers, manufacturing, and trade — matching deal structure to the right capital source. Tell us what you're trying to achieve.
Speak with an Advisor