Reverse Factoring 101

According to The Global Trade review article Supply Chain Finance, the process known as supply chain finance (SCF), or reverse factoring, is the next logical step for factors. The article points out that factoring companies can build on their own receivable offerings and supply this in-demand service to their customers, though some factors are hesitant due to the high cost of implementation. There is a distinct lack of knowledge about this sector, so this post will attempt to enlighten readers on how SCF works.

The SCF process involved the same three parties as the regular factoring process: the factor, the supplier, and the ordering party. In regular factoring, the supplier initiates the process in order to get cash for their receivables. In reverse factoring, the ordering party initiates factoring by choosing which invoices they will allow to be factored. The supplier then chooses which need paid. The end result is the same: the supplier gets advanced funds from receivables.

Reverse factoring is beneficial to suppliers because they get better terms than they would otherwise. It usually works best for small suppliers and big companies as the ordering party. A factor benefits because they are working with companies that have a good, mutually beneficial business relationships and therefore lessening risks of non-payment.

Reverse factoring seems like a logical step for factors. Whether they get on board or stick to what they know best remains to be seen.