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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.
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:
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.
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.
This term 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
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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.