What is the difference between factoring and reverse factoring?

Traditional factoring works on the basis that a company receives funding on its receivables. Conversely, reverse factoring (or supply chain finance) is a solution in which the buyer helps their suppliers to finance their accounts receivable using a more flexible method and at a lower interest rate than would be offered. Reverse factoring also prevents them from having to deal with late payments that can disrupt the business. The reverse factoring scheme is similar to the classic one, but before selling the invoices to the bank, the debtor must irrevocably approve them (see diagram 1 below).

The reverse factoring process involves a party placing the order (a customer) contacting a financial institution, such as a bank. Therefore, reverse factoring helps ordering parties create stronger relationships with suppliers and relieves pressure to pay quickly. Because of the benefits of reverse factoring programs for both buyers and suppliers, these facilities are gaining popularity around the world. In simple words, factoring can be said to be the sale of commercial receivables by the provider to obtain a loan.

The parties that place the order benefit from reverse factoring by not having to comply with prepayment requests. Once the factor receives payment of approved invoices, it will advance the remaining percentage minus a commission. For this reason, most factors will only come into agreements when they are certain that the party placing the order will pay. The PrimeRevenue team works together with you and your suppliers to implement a reverse factoring program that benefits the entire value chain.

A supplier with more suppliers may decide to use reverse factoring to help the supplier in need ensure that the supply chain is not jeopardized. By linking buyers, suppliers and financial organizations, reverse factoring improves cash flow, reduces supply chain risk, and provides a predictable return on investment for funders. Reverse factoring doesn't always mean that the manufacturer is the one who needs cash or working capital. Many financial organizations are willing to enter into reverse factoring agreements because they believe that the party placing the order represents a low risk.

The main benefit of reverse factoring for suppliers is that they can receive payment in 10 days instead of the typical delivery time of 30 to 45 days. Classic factoring frees up additional working capital, which the provider can now use to finance more transactions.

Cassandra Chet
Cassandra Chet

Incurable social media practitioner. Hardcore music ninja. Amateur music buff. Bacon scholar. Devoted coffee lover.

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