Cash flow is one of the most important factors for any business, especially for small and medium-sized enterprises (SMEs) that often face challenges in accessing traditional sources of financing. One of the ways to improve cash flow and overcome working capital constraints is to use reverse factoring.
Reverse factoring is a type of financing that involves a third party, usually a bank or a financial institution, that pays your suppliers on your behalf, at a discount, and gives you more time to pay them back. Reverse factoring, also known as supply chain finance or approved payable finance, is a buyer-led financing program that benefits both you and your suppliers.
How does reverse factoring work?
Reverse factoring works as follows:
· You place an order with your supplier and agree on the payment terms, such as 60 or 90 days.
· Your supplier delivers the goods or services to you and issues an invoice.
· You approve the invoice and send it to your financier, who verifies it and offers to pay your supplier immediately at a discount, such as 95% of the invoice value.
· Your supplier can choose to accept the offer and receive the payment from the financier, or wait until the due date and receive the full payment from you.
· You pay the financier the full invoice amount on the due date, plus a fee or interest.
What are the benefits of reverse factoring?
Reverse factoring can offer many benefits for both you and your suppliers, such as:
· Improved cash flow: You can extend your payment terms and optimize your working capital, while your suppliers can access immediate cash and reduce their days sales outstanding (DSO).
· Reduced costs: You can negotiate better prices or discounts from your suppliers, while your suppliers can lower their financing costs and avoid late payment fees or penalties.
· Enhanced relationships: You can strengthen your relationships with your suppliers by offering them flexible payment options and improving their cash flow. Your suppliers can increase their loyalty and trust with you by delivering on time and meeting your quality standards.
· Increased efficiency: You and your suppliers can streamline your invoice processing and payment transactions by using technology-based solutions that automate and track the reverse factoring process. You can also reduce errors, frauds, or disputes by using verified invoices and payments.
How to use reverse factoring?
To use reverse factoring, you need to follow these steps:
· Find a suitable financier: You need to find a reputable and reliable financier that offers competitive rates and terms for reverse factoring. You should compare different financiers based on their fees, advance rates, funding speed, customer service, and industry expertise.
· Sign an agreement: You need to sign an agreement with the chosen financier that outlines the details and conditions of the reverse factoring service, such as the duration, frequency, recourse or non-recourse options, confidentiality clauses, and termination clauses.
· Submit invoices for financing: You need to submit your invoices for financing to the financier, along with any supporting documents, such as purchase orders or delivery notes. The financier will verify the invoices and offer to pay your suppliers immediately at a discount.
· Inform your suppliers: You need to inform your suppliers about the reverse factoring option and encourage them to accept the offer from the financier. You can also provide them with access to the financier's online platform or portal where they can view and manage their invoices and payments.
· Pay your financier: You need to pay your financier the full invoice amount on the due date, plus a fee or interest.
Conclusion
Reverse factoring is a win-win solution for both buyers and suppliers in a supply chain. By using a third party financier, buyers can improve their cash flow and reduce their costs, while suppliers can access immediate cash and enhance their relationships. Reverse factoring also increases efficiency and transparency in the invoice processing and payment transactions.