What is Reverse Factoring Finance?
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What is Reverse Factoring Finance?
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.
Who benefits from reverse factoring?
All three parties benefit from a reverse factoring arrangement:
- The banks charge interest on monies advanced, enjoying ongoing income from providing this service
- Retailers are able to develop good working relationships with small businesses, retaining good, reliable suppliers.
- Suppliers benefit greatly from regular injections of working capital
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.
So what are the specific advantages for suppliers using this type of invoice finance?
- It’s easy to access as there’s no need to have an impeccable credit rating – it is the buyer that needs to be creditworthy
- Interest rates are generally low when compared with other forms of bank lending
- Regular cash injections allow small suppliers to plan for sustainable growth
- Reverse factoring indicates a strong relationship between buyer and supplier, and that the buyer is concerned for their supplier’s cash flow situation
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%
The bank as an intermediary
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.
