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What Is Reverse Factoring?

Reverse factoring (also known as supply chain financing) is a financing option where a buyer contracts with a financial institution (or a factoring company) to pay its supplier’s invoices. This improves cash flows for both the supplier and the buyer.

Invoice Factoring
The supplier gets instant payment against its invoice at a discounted rate and the buyer gets more time to pay the money. Reverse factoring is essentially a three-way agreement between the supplier, the buyer, and the financial institution.

How Does Reverse Factoring Work?

Debt factoring works in 4 simple steps:

Supplier sends invoice: After supplying the goods, the supplier generates an invoice for the buyer.

Buyer sends invoice to the financial institution: After verifying, the buyer sends the invoice to the financial institution.

Supply chain finance: The financial institution finances the supplier invoice at a discounted rate. In this way, the supplier gets instant cash.

Buyer pays the financial institution: After the invoice has matured, the buyer pays back the money to the financial institution along with the reverse factoring fees.

Other types of factoring:

  • Invoice Factoring
  • Spot Factoring
  • Debt Factoring

Invoice factoring is a financial agreement in which a business sells its invoices (also called account receivables) to a factoring company at a discount. With invoice factoring, a business gets access to immediate cash flow instead of waiting for months for the invoices to get paid. Since the factoring company interacts with the customers to collect payments, it does not remain a confidential procedure.

Spot factoring enables a business to sell individual invoices selectively. This type of factoring allows businesses to choose which invoices to factor based on their cash flow needs. It is also known as single invoice factoring or selective invoice factoring.

Debt factoring, also known as receivables factoring or invoice factoring, involves a business selling its accounts receivable (unpaid invoices) to a third party. The factoring company buys these invoices at a discounted rate, providing immediate cash to the business.

  • Recourse factoring
  • Non-Recourse Factoring
  • Account Receivables Factoring

In recourse factoring, the business that sells its invoices to the factoring company remains liable if the customer fails to pay the invoice. If the customer defaults, the business must buy back the invoice or replace it with another. The risk of non-payment remains with the business.

With non-recourse factoring, the factor assumes the risk of non-payment by the customer. If the customer fails to pay due to insolvency or credit issues, the factor absorbs the loss, and the business is not responsible for repayment.

The term accounts receivable factoring is used interchangeably with invoice factoring. It involves the business selling its unpaid invoices (account receivables) to a third party at a discounted rate to receive early payments. Upon receiving the invoices, the factoring company releases the bulk of payments, usually up to 90% of the collective invoice value). The rest is paid (after fee deduction) when the payment is collected in full from the end customers.

Sectors That Reverse Factoring Covers

Retail

Mechanics

Restaurants

Bars & Clubs

Leisure Clubs

Plus Many More

Differences Between Traditional Factoring And Reverse Factoring

Traditional factoring is like fast-tracking your invoice payments. You sell your unpaid invoices to a factoring company, which gives you most of the money upfront. This helps with your cash flow, and they deduct a portion of the invoice funds as their fee. Then, they take over collecting the full payment from your customers. 

On the other hand, reverse factoring is like teamwork between you, the factoring company, and your supplier. Here’s how it works: Let’s say you’ve purchased your products or services from a supplier, but you usually take your time to pay them back. Instead of waiting, you can choose to work with a factoring company to pay your supplier faster.  The factoring company pays your supplier immediately while you can clear your dues to the factoring company at a later date for a fee.

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Benefits of Reverse Factoring

The good news is that all three parties involved in reverse factoring get something out of it.

  • The factoring company, of course, gets its fees.
  • The supplier does not have to wait 30 or 60 days to get its payments.
  • The business gets additional time to pay back the supplier’s invoices.

Reverse factoring improves cash flows for suppliers, gives businesses more time to clear their payments, and strengthens the supply chain.

What can you do with debt factoring?

Invest in stock, HR, & equipment

Access capital for essential business needs.

Focus on High-Value Operations

Free up time by outsourcing collections.

Improve Cash Flow

Convert unpaid invoices into immediate funds.

Fuel Growth

Use funds to expand, and invest in stock, HR, or equipment.

Reverse Factoring FAQs

When it comes to reverse factoring, ComparedBusiness is here to help you save time and money. You can easily submit your business requirements through ComparedBusiness in under 2 minutes.

You will get quotes from top Reverse Factoring companies delivered to your email. You can then compare and choose the most suitable option per your business needs.

Absolutely. Leveraging the credit of larger clients, this reverse factoring (supply chain factoring) offers improved access to affordable funding, enabling smaller enterprises to enhance their financial stability and growth opportunities.

Reverse factoring benefits all parties involved in the supply chain. Suppliers receive quicker access to funds, improving their cash flow. Buyers optimize their working capital by extending payment terms, and financial institutions earn fees by facilitating the transactions.