Updated: 3rd February 2016
Reverse factoring is a system that enables large retailers to pay selected suppliers quickly. It encourages stronger trading relationships, fosters goodwill, and helps smaller businesses to grow.
The system works with the involvement of a financial intermediary in the form of the retailer’s bank. They provide the finance facility which is based on the invoices received from suppliers. The full value of outstanding invoices submitted to the retailer becomes available, and in some cases suppliers can choose which invoices they want to factor via an online system run by the bank.
All three parties benefit from a reverse factoring arrangement:
Also known as supplier, or supply chain financing, this type of invoice funding helps smaller businesses to grow by keeping cash flow stable - the reverse factoring system addresses the issue of the lengthy wait for payment suffered by many small businesses.
Additionally, the supply chain is stabilised by ensuring suppliers don’t go out of business through delays in payment.
100% of the value of an invoice becomes available from the lender, unlike ‘standard’ factoring and discounting arrangements where it is generally between 80% and 90%
A reverse factoring arrangement is actually a three-way contract between the retailer, their bank and the supplier. The bank’s position in the supply chain is key to the success of this arrangement, and their presence affords the other two parties a competitive edge within their individual markets.
Early payment discounts may be forthcoming from the supplier, and the buyer enjoys an enhanced reputation for providing fast payment in return for goods. Online systems allow all parties to view transactions and invoices, with the bank activating each cash advance once a submitted invoice has been buyer-approved. Their risk is centred on the buyer rather than the party being funded. As the buyer is a large organisation with excellent credit history, interest rates and service fees should be lower.
If you want to find out more about reverse factoring, call one of our expert team at Real Business Rescue. We offer professional and unbiased advice on all aspects of business invoice finance, and can help you decide whether reverse factoring would work for your company.