Unlike traditional factoring, where a supplier wants to finance its receivables, reverse factoring (or supply chain financing) is a financing solution initiated by the ordering party (the customer) in order to help its suppliers to finance its receivables more easily and at a lower interest rate than what would normally be offered.
The reverse factoring process:
- The buyer places an order with the supplier.
- The supplier fulfills the order and issues an invoice for the buyer.
- The buyer then approves the supplier’s invoice and initiates the factoring process.
- The supplier then sells the invoice to the factoring company.
- Thereafter, the supplier receives close to 100% of the invoiced amounts from the factoring company (contrary to factoring arrangements where the invoice amount is discounted by at least 10%)
- As agreed, the buyer pays the invoice amount to the factoring company when the invoice is due, plus fees.
Advantages of reverse factoring
- The supplier company has low-interest rates as the arrangement is based on the creditworthiness of the buyer.
- The buyer can have longer payment terms with the suppliers without having to negotiate any other factor such as prices.
- The trade payables increase so the buyer experiences efficiency in daily operations. This results in improved working capital optimization for the buyer.
Disadvantages of reverse factoring:
- Eligible ordering parties are often large companies with an AAA credit rating. In fact, this product was invented for large retail groups, known for paying their suppliers only after a very long time.
- Agreements can be quite lengthy, with businesses having to commit for up to two or three years sometimes.
- Suppliers can get trapped in a system where they lose the ability to determine exactly which invoices will be paid up front.
- Payment orders generally cannot be cancelled.
- Suppliers may refuse the arrangement because they can find better factoring deal for themselves.
Why CreditDigital is better than reverse factoring:
Factoring is not only very labour intensive but also costly for a business. Factoring companies usually require their customers to mail or fax in original copies of every single invoice. What is more there is additional work required throughout the collections process, as the business often retains liability over the outstanding invoices.
Thanks to CreditDigital, you get 100% of your invoices within 1 business day, totally risk-free and cost-free. Furthermore, our payment solution seamlessly integrates with your online checkout, eliminating the difficulty of collections. CreditDigital gives your business customers choice of payment terms, from 30 days up to 360 days, which helps you increase sales.
Offer a credit line to your business customers today!