Reverse factoring is one specific receivables finance product which is more largely used as a supply-chain finance product. Contrary to usual factoring products, reverse factoring is initiated not by the supplier of goods or services, but by the buyer. Banks play an essential part in this kind of arrangement. According to a new study from the UK’s Association of Chartered Certified Accountants, Reverse factoring could potentially provide between $255 billion to $280 billion of cross-border trade financing, or 20 to 25 percent of an industry’s accounts payable.
With reverse factoring, the usual frameworks is that the buyer approves the invoice, funds are raised against accounts payable by the bank, and the bank releases up to 100% of the invoice amount for the buyer. When the invoice is due, the buyer pays the bank, and the bank pays the supplier. Contrary to a factoring arrangement, the business can choose which invoices the factor will pay. In reverse factoring, it’s the buyer’s liability which is engaged.
Advantages of this type of financing include, obviously, faster payments to the supplier, but also low interest rates, improved commercial relationships between buyers and suppliers, complete availability of invoiced funds, as opposed to traditional factoring.
Disadvantages include a limitation of this kind of service to highly established corporations with high credit ratio, long binding agreements, and the impossibility to cancel payment orders.
- How can factoring help my business improve cash flow?
- What are the requirements for factoring?
- Can I pick and choose which invoices are factored?
- How does a factor determine which invoices to accept?
- What's the difference between factoring and invoice discounting?
- What does a typical factoring contract contain?
- How much cash will I get up front for my invoices?
- What are the different types of factoring?