Reverse factoring, more commonly known as Supply Chain Finance, takes place when a large company with multiple product lines introduces one or more of its smaller suppliers to a specialist provider of Invoice Finance facilities.
The Invoice Finance organisation will then provide the smaller supplier with funding secured against invoices to the larger buyer. The funder is often able to offer enhanced facilities to the supplier as a result of the additional security derived from the financial strength of the buyer.
The advantage to the larger buyer is that they are protecting the financial strength of the companies that make up their Supply Chain by securing early, and most importantly, predictable payments for their smaller suppliers. This means that the larger buyer will have a more stable Supply Chain that is less likely to be late with deliveries or deliver sub-standard products, issues which are often linked to cash flow problems with the supplier.
The advantage to the supplier is that they receive valuable working capital finance that they may not otherwise have been able to secure, using the financial strength of their buyer as security for the lender. The funding will be made available to the supplier as soon as the invoice is raised and mean that they are able to fund the completion of the next orders coming through.
Reverse factoring often centres on the financial intermediary’s online platform, where suppliers will upload their invoices to the larger buyer.
With traditional invoice finance providers it is likely that all invoices to the buyer will need to be financed. This will incur a monthly service charge and an interest rate applied to the level of funding advanced. The supplier will also need to commit to an agreement of between 12 and 24 months.
With a Selective Invoice Finance facility the supplier is able to choose which invoices are financed and will pay a fee on these transactions only. This methodology can provide an extremely flexible form of financing for suppliers to large organisations giving them increased control of their working capital.