What is Reverse Factoring?

Improve Your Supplier Relations

Reverse Factoring – though quite popular in Europe as a form of alternative financing – remains rare in North American markets. It is similar to traditional invoice factoring insofar as it involves three independent parties; the buyer, the supplier and the factor. Like traditional factoring, the aim is to have a third party financier (the factor), finance the supplier’s receivables so the supplier can receive the cash they need to operate their business.
But contrary to the traditional services, reverse factoring is not initiated by the supplier presenting their bills to the factor to be paid earlier. When working with a reverse factoring company, the buyer – usually a large company – initiates the process by choosing invoices that he will allow to be paid earlier by the vendor. Then, the supplier(s) choose which of the invoices they would like to be paid by the factor. It is therefore a really collaborative project between the buyer, supplier and factor.

A Win-Win Situation: Reverse Factoring Company

The success of a Reverse Factoring program is based on the contract between the large buyer, the supplier(s) and the factor. The suppliers continue invoicing the large buyer, who confirms the correctness of the invoices to the factor, thus making them “payables”. In that case 100% of the invoice amount – less the agreed upon discount) is immediately paid by the factor to the suppliers. The large buyer then pays directly to the factor on expiry of the standard credit term (usually up to 90 days).
Reverse Factoring in Canada provides advantages on all sides of the supplier-customer relationship. It is basically a win-win situation:

Advantages for the Supplier:

  • Supplier has his invoices paid quicker; thus immediately improving cash-flow.
  • Supplier is “factoring” selected receivables at a discount rate based on the strength of the Buyer; with no set minimum volume commitments or long-term contracts with the factor.
  • There is also no recourse back to the Supplier in the case of non-payment.
  • 100% of the invoice is available to the Supplier (less the agreed upon discount). There is no “Reserve” or “Holdback”.

Advantages for the Buyer:

  • Buyer maintains or extends payment terms, and in some cases, can earn a portion of the discount in the form of a rebate from the Factor.
  • Buyer no longer deals with individual requests for “quick-pay” from Suppliers since the program is standardized.
  • Closer and more positive relationships are built with the supply chain since the program is an offering and is not mandated. Suppliers can opt in and out as needs arise.

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