Suppliers have a difficult relationship with many corporates as these buyers dictate their payment terms. Suppliers also do not want to wait a long time to be funded as they are usually growing businesses with high capital expenditure costs. Conversely, suppliers understand the huge opportunity that is presented to them when faced with a purchase contract from one of these large entities.

Reverse factoring started in the car industry, as it allowed car companies to work more efficiently with their smaller supply companies. It also assists in industries where payment delays are the main fear or roadblock to the business.

The market size of reverse factoring is relatively small (around 3%) as a proportion of the entire factoring market. Aite Group has estimated that the market size for reverse factoring was between US$255-280 billion in 2015.

The benefit of a reverse factoring facility is that it is usually a simple system set up and there are lower costs involved to the supplier. The reason is due to the funder taking credit risk on the large corporate compared to the small supplier. The financier behind a scheme may also charge the supplier a couple of percent of their funding line, to join the reverse factoring scheme.

The availability of reverse factoring means that it could provide a line of finance to companies that was previously inaccessible. Growing suppliers are able to receive funding quicker, so assisting with their growth and avoiding any potential insolvency situation. It also important to note that reverse factoring would be more inexpensive than traditional factoring arrangements.

Reverse factoring will work where a funder sits between a company and its suppliers; where there is a commitment to fund the company’s invoices from suppliers at a faster rate than provided by a company; in substitution for a discount.

Traditional factoring works on the basis that a business receives finance on their receivables. Conversely, reverse factoring (or supply chain financing) is a solution where the buyer assists his suppliers by financing their receivables using a more flexible method and at a lower interest rate than would be offered. As a proportion of the market; reverse factoring is less than 5% of the factoring market.

This is a very beneficial relationship as everyone in the chain understands the necessity of the funder and as the buyer is assisting the supplier it can hopefully mean a longer term and more beneficial long-term relationship.

Types of reverse factoring include:

• Cash flow from the business or lending
• Invoice finance
• Invoice discounting
• Import factoring
• Structured finance

Companies looking for reverse factoring are generally seen on a case by case basis. Normally, a financier would ask for the following in an application:

• Audited financial statements
• Full business plans
• Financial forecasts
• Credit reports
• Details and references of the directors
• Information on assets and liabilities

The liability of the funder is concentrated on a large credit worthy company

It means that a funder does not have to worry about fraudulent invoices

There is clarity for all parties on knowing when payment will be received; so no long or unnecessary delays

It limits any disputes as both sides have agreed the invoice

Reduces supplier cash flow demands and management of invoices

It is a validated regime, so as soon as both parties have agreed to an invoice – the supplier is protected in a later non-payment event

A funder only has one party to collect payment from – which is usually a large corporate

Close relationships are created between buyers and groups of suppliers; allowing new companies to work with large corporates

There is less administration and chasing for payment

The agreed rate in relation to the whole invoice is advanced, compared to in a standard discounting scenario where there is a percentage advance rate with the collecting of a further sum on payment

Liability and risk is assumed by the (usually) larger buying company, so the rate of interest is lower