Reverse factoring and confirming are two financial terms that are often used interchangeably in the world of finance. However, they do not mean the exact same thing. Both are indeed initiated by buyers to support the supply chain and improve cash flow, but the differences exist in their purpose and who benefits most. Understanding this difference will help you choose the right solution for your business, whether you are a buyer or a supplier.
Key takeaways
- Both terms are used interchangeably: In the industry, many providers use the terms to talk about the same service, which is a buyer-initiated supplier payment financing.
- Initiated by: Both arrangements are initiated by the buyer, not the supplier. The buyer chooses the lender and sets up the arrangement.
- Nature of the process is different: Reverse factoring focuses on supporting supplier cash flow, whereas confirming focuses on outsourcing the buyer’s payment management.
- Cost advantage for suppliers: Financing arrangement is based on the buyer’s credit rating; suppliers can access cheaper rates.
- Who pays what: The supplier pays the discount fee in both arrangements. The buyer pays a small administrative fee or a set-up token.
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What is reverse factoring?
Reverse factoring, also known as supplier financing is a financial agreement between 3 parties – a supplier, a buyer and a factoring company. In this arrangement, the buyer helps the supplier receive early payment for their invoices through the factoring company (which finances the transaction).
Unlike traditional factoring, where the business seeks financing to get paid faster, reverse factoring is initiated by the buyer or the customer. The main goal is to improve cash flow for the business while allowing customers/buyers to maintain or extend payment terms.
How does reverse factoring work?
Step 1: Supplier submits invoice
The business or the supplier delivers goods or services to the customer/buyer and submits an invoice.
Step 2: Buyer confirms the invoice
The buyer verifies the invoice, confirming that the goods have been received and the invoice amount is accurate.
Step 3: Factoring company pays the supplier
Upon receiving the buyer’s approval, the factoring company pays the supplier the full invoice amount or a significant portion of it (80% to 90%), often within a few days minus a fee.
Step 4: Buyer pays the factoring company
The buyer then pays the factoring company the invoice amount on the due date, adhering to the agreed-upon payment terms.
What is confirming?
Confirming is a financial service provided by a bank or factoring company that assists companies manage their payments to suppliers more efficiently. In confirming, the buyer authorises a bank to handle the payment of invoices on its behalf, as a result of which the supplier receives early payment.
Confirming is particularly helpful for companies with a large volume of suppliers, as it streamlines the payment process and improves relationships with suppliers by ensuring timely payments.
How does confirming work?
Step 1: Supplier submits invoice
The supplier submits an invoice to the buyer for payment.
Step 2: Buyer approves the invoice
The buyer reviews and approves the invoice and sends it to the financial institution managing the confirming service.
Step 3: Financial institution offers early payment
The financial institution notifies the supplier of the approved invoice and offers the option of early payment. If the supplier opts for early payment, they receive funds minus a discount.
Step 4: Buyer pays the financial institution
On the invoice due date, the buyer reimburses the financial institution for the full invoice amount. The buyer may incur a fee for the confirming service.
Compare Reverse Factoring and Supply Chain Finance in our detailed guide. Read here.
Cost breakdown: Reverse factoring vs Confirming
Let us look at a detailed cost breakdown for both reverse factoring and confirming. To get an accurate idea, we first start by explaining the actual factors that decide the financing costs.
Factors influencing costs
Reverse factoring and confirming costs are influenced by a set of factors:
- The credit rating of the buyers: If the credit rating of the buying business is high, a lower discount rate is offered to the suppliers.
- Invoice volume: A higher volume of invoices means lower fees for the suppliers, because invoices in bulk carry better rates than lower volumes.
- Payment terms: The financing costs are higher for long-term invoices than for short-term invoices.
Reverse factoring costs
In reverse factoring, the discount and service fee are paid by the supplier in exchange for early payment of invoices. The buyer pays only a small portion of the cost, like an administration or set-up token. The financing is based on the buyer’s creditworthiness, so the supplier benefits from getting lower discount rates as compared to if they factor the invoices on their own. This way, the buyer’s strong credit reduces the overall risk associated with the supplier’s invoices.
Suppliers receive the full invoice payment upfront (92%-95%) minus a fee deducted as the financing cost (5%-8% of the invoice value).
Confirming costs
Upon confirming, the cost structure is mostly similar except for one difference. In this case, the buyer pays a fee to the financial institution for managing the payment process, which is comparatively higher than in reverse factoring. The rest of the process remains the same, that is, the supplier opts for the early payment and receives the funds minus the factoring fee.
Key differences between reverse factoring and confirming
While both confirming and reverse factoring are aimed at improving the efficiency of payments between the 2 parties (buyer and supplier or customer and business), they differ in their structure, purpose and benefits. Let’s have a look.
1. Nature of the process:
Both are initiated by the buyer, but there is a difference in the targeted goal in each. The main goal of reverse factoring is to support suppliers with early payment so the buyer does not have to ask for an extension in invoice duration or instalments, and the supplier is not financially pressured.
However, confirmation is mostly centred on outsourcing the payment process to another institution so the buyer can simplify its own management.
2. Main purpose:
Reverse factoring focusses on improving the supplier’s cash flow by offering them early payment, generally in exchange for a discount. It helps them reduce their working capital needs.
But the main purpose of confirming is to streamline the payment process for the buyer by ensuring timely payments to suppliers. While it offers early payment, the primary benefit is operational efficiency for the buyer.
3. Risk management:
Reverse factoring reduces the financial risk for suppliers, as they receive payment regardless of the buyer’s payment cycle. Confirming, however, primarily reduces the operational risk for buyers by outsourcing payments, though it can also benefit suppliers if they choose early payment.
4. Usage:
Reverse factoring is usually employed by large companies with numerous small suppliers to strengthen the supply chain, while confirming is mainly used by companies with complex supply chains to manage the payment process with more efficiency.
Summary: Reverse factoring vs confirming
| Aspect | Reverse factoring | Confirming |
|---|---|---|
|
Who initiates |
Buyer |
Buyer |
|
Primary goal |
Improve supplier cash flow |
Streamline the buyer's payment management |
|
Primary benefit |
Supplier gets early payment at lower rates |
Buyer gains operational efficiency |
|
Who pays the fee |
Supplier pays a discount fee; buyer pays a small admin fee |
Supplier pays a discount fee; buyer pays a higher service fee |
|
Risk reduced for |
Supplier |
Buyer |
|
Best suited for |
Large buyers with many small suppliers |
Buyers with complex supply chains |
Are reverse factoring and confirming the same thing?
Right up till now, you might have noticed that we have discussed the major differences of reverse factoring and confirming, but many similarities also exist alongside. That brings the question of whether the two are actually the same services.
The answer is yes; largely, the two terms are the same and offer similar financing services. Both are initiated by the buyers, where the supplier gets early payment, which gives the buyer extra time to clear payments. The only difference lies in the real-world implications. Depending on the specific situation, if the buyer is focused more on supply chain optimisation or payment process outsourcing, they can choose either of the two options.
Still not sure about Reverse Factoring? Read our guide about disclosed and undisclosed factoring to see if that option is more suitable for your business.
When to choose reverse factoring?
Reverse factoring is good for you if:
- You are a buyer who works with a large number of suppliers
- Want extended payment terms from 30-90 days
- Do not want tension in the supply chain and are requesting instalments from the supplier
Mostly, the businesses operating in sectors like retail, automobile and manufacturing benefit most from such arrangements. Reverse factoring is the right middle option when you (as a buyer) do not want to pay high interest rates on bank loans and would rather access cheaper financing.
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FAQs
Some of the cons of reverse factoring include cost, as it can be expensive due to fees charged by the factoring company; dependancy, as suppliers become reliant on early payments; and complexity, as it can be difficult to manage multiple agreements between parties.
In reverse factoring, the seller typically pays the interest or fees associated with the early payment provided to the supplier. However, the arrangement can vary as well, and in some cases, the buyer may bear a portion of the cost.
No, reverse factoring and confirming are not the same. Reverse factoring focuses on providing early payment to suppliers and is used to improve cash flow. Confirming, on the other hand, is a service where the buyer outsources the payment management to a financial institution, giving suppliers the option to receive early payments.
