Federation of Worldwide Chambers of Exporters and Importers

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By: Admin 15-Sep-2019 FOWCham

WHAT IS REVERSE FACTORING? HOW IS IT BENEFICIAL?

Reverse Factoring is the process in which suppliers are paid the payment for their exported goods in a timely manner. This payment is taken care of between large retailers and banks. When a buyer approves the invoice sent from the seller, the funder (bank or any financial institution) provides the seller with finance that is against the account payable (AP). The buyer then agrees to pay the funder at the agreed time as per the invoice sent.

The need for this system is felt when in some cycles there are long delays by large companies to pay suppliers. Large companies (such as retailers) will agree to pay a bank the money which is owed to creditors within the trade and banks would then pay suppliers the money that is owed to them immediately. This procedure seems more beneficial than waiting for 30-90 days which is required by the large retailers.

There are different types of Reverse Factoring procedures:

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

Benefits of Reverse Factoring:

This is considered as a simple export factoring mechanism where the there is ease of payment and proves to be cost-effective as compared to traditional factoring arrangements for the supplier and it cuts down the waiting time for the payment receiver.

Reverse factoring works best when there is a funder between the buyer and the seller, where there is a commitment to fund the invoice of the supplier at a faster rate than the time duration provided by the company (receiver).

This is a better option as everyone in the chain understands the necessity of the funder and as the buyer and the funder is assisting the supplier they get into a long beneficial financial relationship.

In this case, the liability of the funder is concentrated on the adequate credit of the company which means that the funder does not have to worry about fraudulent invoices.

The agreed rate in process of the whole invoice is made in advance, as compared to in a standard discounting scenario where a partial payment is made in advance with the collecting of a further sum on payment.

There is no space for delay or chasing for payment.

Documents required for Reverse Factoring:

  • Audited financial statements
  • Full business plans
  • Financial forecasts

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Federation of Worldwide Chambers of Exporters and Importers