What is Reverse Factoring?
Increasingly, suppliers are finding themselves challenged with meeting customer expectations of offering longer payment terms. The business-to-business landscape has now evolved into a situation where 15 or 30 days no longer suffices and customers need their due dates extended. This inevitably leads to a gap in liquidity for suppliers and, without investment capital, missed opportunities for growth.
The answer to that challenge is 1st Commercial Credit’s reverse factoring program for international and domestic businesses in need of short-term financing.
Reverse factoring is a financial instrument that allows a business finance company to interject itself between suppliers and businesses it serves. The finance company commits to making discount payments to suppliers for its business customer at an accelerated rate. The purpose is to offer a lower cost financing resource so suppliers are not waiting longer than 60 to 120 days to receive payment for their accounts receivable.
Unlike basic factoring where the seller seeks to sell receivables, the one ordering products – the buyer – will initiate the process. Typically, this is a large company who wants to avoid negatively affecting their supplier’s cash flow, but at the same time, needs to extend their payment terms.
One similarity to basic factoring is the involvement of three entities: the buyer, seller and finance company. Since the buyer initiates this process, he chooses which suppliers are paid early by the finance company. The suppliers select which invoices are funded through 1st Commercial Credit.
Reverse factoring offers a win-win solution to both the buyer and supplier with increased cash flow. The buyer delays paying an invoice for as much as 12 days. Since the supplier will have a difficult time with cash flow on those terms, he can get paid in as little as 10 days versus longer payment terms.
Considered an effective optimization tool for improving cash flow, reverse factoring is the go-to financial resource for global and domestic supply chain transactions.
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What Reverse Factoring Does for Businesses We Serve
Many businesses, particularly those connected to global supply chain, face problems with getting adequate financing during the production cycle of their suppliers. Participating in emerging markets may limit some of those same businesses when they have not established a creditworthy reputation to receive good financing terms.
This is where the uniqueness of reverse factoring plays a major role. Financing received from the supplier’s accounts receivable is based on the credit worthiness of the buyer, not the supplier. The buyer is accepted as the large solvent company that has excellent financial ratios. Not only this, but the buyer has a prearranged agreement with the factoring company that guarantees invoices used in transactions will be paid.
If the supplier agrees to the terms, the factor company extends cash payments to the supplier based on the buyer’s high-quality ranking of being a good credit risk. The high risk of being a small player in the global arena is never used for approval.
Another advantage of reverse factoring is it becomes an attractive financing tool where the buyer benefits from longer payment terms. Funds can then be used in the interim for growth opportunities to expand the buyer’s presence in his respective industry. High-risk suppliers gain access to immediate working capital that is financed at low rates.
In knowing how reverse factoring helps the businesses we serve, it helps to understand the context in which “reverse” is used. Basically, this financing tool is based on a contract between the buyer, supplier and 1st Commercial Credit. The idea of factoring invoices shifts to the purchasing side and supplier relations. Other forms of factoring dealt with the services a buyer provided to his customers, not materials he needs to produce those services.
Suppliers can continue to invoice the buyer for those materials. The buyer confirms the accuracy of the invoices to our company and we can transfer a large percentage of the invoice amount to the suppliers’ accounts. Payment is made directly to us once the credit period ends. This can be for as long as 180 days.
Advantages are seen on all sides of the supplier-buyer relationship with a win-win situation:
• Buyer gets the advantage of longer payment terms
• Suppliers have immediate access to cash flow
• Both sides can enjoy discounts
• Relationships with suppliers become stable with regular shipments
• Production downtimes are protected
• Buyer’s good credit rating positively impacts the financing solution
• Reverse factoring makes impossible financing terms from traditional sources possible
Benefits of Reverse Factoring to Your Company
Finding cooperation between finance and procurement should extend the initiatives you may try to adopt within your organization. In today’s network, this change in direction is practically a given. Seeing beyond the borders of your company ensures you can discover opportunities that increase your competitive edge.
Being poised to take advantage of those opportunities before your competitors requires finances behind those actions. Reverse factoring offers this benefit to your organization. As such, this financial instrument fits a broader trend in competition. Smart competition includes the use of supply chain to survive the era of globalization.
Reverse Factoring Benefits Suppliers
• Cash flow struggles end since invoices can be paid early
• Usually comes with a low-interest rate since credit standing of the buyer is used for the financing agreement
Cash-strapped suppliers are paid much sooner than normal circumstances when the factoring company does not act as the intermediary. Low interest rates makes this an attractive source of financing since the credit standing of the buyer is used. Of course, this assumes the buyer has a good rating.
Suppliers begin to see immediate liquidity in one of their most valuable assets. Additionally, they never have to worry about defaults on receivables since we are the ones collecting payment from buyers. For some suppliers, this type of financing can also translate into an improved equity ratio with a reduction on their balance sheet once receivables are sold.
Reverse Factoring Benefits Buyers
• Closer business relationships with core group of suppliers is developed since worries about payments of invoices is all but eliminated
• Buyers are not bombarded with requests for payments from suppliers since payment is made as soon as possible
Reverse factoring offers a payment solutions to suppliers and buyers that delivers a win-win scenario craved by those in the supply chain industry. More suppliers are moving towards this guaranteed payment option to optimize expansion and growth opportunities. Suppliers who provide a large volume of goods and services will greatly appreciate these benefits.
One reason reverse factoring is attracting so much attention is each party in the deal – the buyer, the supplier and financial institution – all benefit from this well-designed program.
If you are a buyer operating a large, multinational corporation, reverse factoring may be a great way to leverage credit lines a borrowing costs. With a proven track record of stability and strong industry performance, you can use this to your advantage to improve working capital.
No business that needs to buy goods to satisfy orders should overlook the advantages of using reverse factoring as an alternative financial solution. The idea of utilizing this transaction to purchase goods relives the difficulty of funding purchases through buyers who need their invoices paid sooner than you expect.
Reverse factoring through 1st Commercial Credit is an exceptionally effective tool that ensures sustainability for the businesses that are crucial to your supply chain.
As a supplier with a healthy cash flow, you not only have the guarantee of a quick turnaround of invoice payments, but you will also be able to fulfill more orders. Previous payment terms become unnecessary and will not disrupt the flow of business.
As the finance company, we become the intermediary for a robust group of suppliers and well-established buyers. Typically, reverse factoring is available for suppliers who have a solid working relationship with buyers of their products and services.
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• Hi-tech companies
• Automotive parts distributors
• Heavy plant facilities
• Food and beverage
This is not an exhaustive list, but represents a portion of the types of businesses who benefit from using reverse factoring for their financing needs. Long-term trading relationships are put to the test, but most often will strengthen because of the unbroken link in the supply chain side of business.
Improved cash flow works to everyone’s advantage when suppliers can continue to service their customers without the worry of meeting their own business-related expenses. Working capital is unlocked and suppliers have the freedom to use resources in areas such as product development. They are stuck between growing and waiting for payments from buyers.
How 1st Commercial Credit Provides Reverse Factoring Services
1st Commercial Credit, LLC is recognized as one of the largest providers of factoring services to international and domestic businesses with a vast network of affiliates around the globe. Our complete line of invoice factoring and related financial services is among the best in the industry.
Our solutions connect buyers and suppliers in a lasting partnership that strengthens both sides in the supply chain business as more continue to stretch across the globe. Early payment, liquidity and cash flow are necessary for doing business in today’s world.
We bring that visibility to suppliers who need invoices approved for early payment and buyers who need longer times to satisfy those invoices. With 1st Commercial Credit, you receive favorable discount rates compared to financing terms from traditional sources. As a reverse factoring solution, 1st Commercial Credit helps to alleviated credit limit issues and credit exposure that constrains otherwise profitable buyer-supplier relationships.
Wherever we operate around the globe, our clients are guaranteed to receive innovative financial solutions that exceed their expectations.
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