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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:
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.