Reverse factoring

Reverse factoring

Reverse factoring, also called supply chain finance or approved payables finance, is an arrangement where a large buyer helps its suppliers get paid early. The buyer approves a supplier's invoice and confirms it will pay on the due date. A finance provider then offers to pay the supplier immediately, minus a small discount. On the due date, the buyer pays the finance provider in full.

The key difference from ordinary factoring is who starts it and whose credit matters. In ordinary factoring, the supplier sells its invoices and the pricing reflects the supplier's risk and the risk that the invoice is disputed. In reverse factoring, the buyer sets up the programme and has already confirmed the invoice, so the pricing is based mainly on the buyer's credit, which is often much stronger than the supplier's.

The supplier gets cheaper, faster cash. The buyer often negotiates longer payment terms without hurting its suppliers. The finance provider gets a short, self-liquidating exposure to a strong payer.

The main risk is disclosure. Large reverse factoring programmes can make a buyer's debts look like ordinary trade payables rather than borrowing. Accounting rules have been tightened to require clearer disclosure of these programmes.