Reverse Factoring, also referred to as Supply Chain Finance (SCF), is a Supply-Chain-Management strategy deployed by buying organizations (i.e. buyers) to improve its working capital without negatively affecting the supplier base.
In order to improve a buyer’s working capital, a payment term extension or payment term harmonization strategy across all suppliers is generally pursued. In order to minimize possible negative affects to the supplier’s performance and stability caused by the payment term extension, buyers can offer reverse factoring programs, where the supplier can sell their approved invoices to a third-party financial institution at a discount, receiving their cash prior to the invoice maturity. At invoice maturity, the buyer pays the full invoice amount to the financial institution.
By offering suppliers the choice to finance their invoices at comparably lower financing costs the effects of the payment term harmonization can be mitigated and the supplier base in return strengthened.
- Buyer: The debtor of an invoice. In the context of SCF, the buyer represents the corporate that wants to offer its suppliers an early-financing solution
- Supplier: The creditor of an invoice. In the context of SCF, the supplier represents the vendor that supplies a corporate (i.e. buyer), and uses the SCF portal to finance its invoices
- Financier: The funder of an invoice. In the context of SCF, the financier represents a third-party financial institution that provides liquidity to a buyer’s SCF program and funds the supplier’s invoices
The Reverse Factoring Workflow
The supplier issues an invoice to a buyer together with the delivery of goods and services (1). The buyer approves the invoice and uploads it to a platform (2). The supplier can review and select his approved and uploaded invoices on the platform and freely decided which invoice they want to finance. This can be done automatically or manually (3). The invoice is then offered to the participating financiers which bid on it in a transparent and competitive auction model (4). The winning financier then pays the supplier the nominal amount minus the discount (5). At maturity of the invoice, the buyer pays the full invoice amount to the bank (6).
Advantages of Reverse Factoring
- Stabilization of supplier base by improving the supplier’s cash flow
- Financiers pay invoices faster at attractive discounts and suppliers no longer have to wait for the account receivables
- Reverse Factoring releases previously trapped liquidity, leading to an improved cash flow and better cash flow management
Can generally access comparably low-interest rates due to the fact that they are based on the creditworthiness of the buyer company, not the rating of the suppliers
Improve working capital by extending or harmonizing payment terms (days payable outstanding) without negatively affecting performance or well-being of his suppliers
Benefit from attractive alternative investment opportunities in the short-term market
CRX Markets Product Offering
CRX Markets offers a full-range reverse factoring solution to all relevant parties involved. The offering includes the following services:
- Full automation through seamless integration to all relevant party’s core systems to ensure a fast, scalable and reliable process
- Completely digital onboarding process to reduce workload for buyer and allow suppliers of any size to join the program
- Best-price determination by leveraging auction theory during financing
- Straightforward costs with no hidden fee for maximum transparency
- Close and continuous support through our client support
Key Facts and FAQs: Reverse Factoring
The buyer company (the ordering party)
- Reverse Factoring helps to strengthen the supply chain and reduce risk.
- Buyers can stabilize their supply chains, optimize working capital and generate positive cash effects.
- Suppliers can reduce their days sales outstanding, benefit from attractive financing rates and therefore improve their liquidity.
- Factors generate attractive returns on short-term risk, gain access to an alternative asset class, further diversify their portfolio, improve relationship with buyer entities.
The key differentiator between Factoring and Reverse Factoring is the risk position. Reverse Factoring removes any supplier risk by approving the invoice and providing an irrevocable payment obligation to financiers, whereas Factoring includes a debtor’s and a seller’s risk as well as processual risks (e.g. collection, comingling).
The globalization of markets, the general trend toward specialized suppliers and the growth in outsourcing has made a diverse and differentiated supply chain essential for globally operating companies. The increasing role of suppliers in the production process and the growing dependency of buyers on their suppliers creates new challenges for supply chain management in general, and working capital optimization in particular.
At CRX we have developed two ways a Reverse Factoring program can be structured: Multi-Bank Approved Payables Finance (APF) and Multi-Investor APF. The Multi-Bank approach enables the buyer-approved supplier the true sale of approved payables to a group of connected banks at competitive prices. The Multi-investor solution expands the Multi-Bank offering through a transparent yet fully anonymous auction platform where banks and Investors compete for securitized payable bundles.