Reverse factoring is a method of funding your business similar to traditional invoice factoring. Unlike regular factoring, however, reverse factoring allows businesses to receive cash advances of up to 100% of the sum of their unpaid invoices because the process is focused on working with both the business and individual “high quality” customers. This makes factoring an even more attractive option to businesses who cannot take out loans or do not want to take on further debt.
Traditional invoice factoring is initiated by the company that provides a service or delivers a product to a customer or buyer. That company does not want to wait weeks and months for their customers to pay on their invoices. However, the reverse factoring process is started by the customer – the company that ordered the service or product. The process lets the supplier of the product or service get paid promptly and take advantage of more affordable finance terms for early payment. It also lets the ordering company receive the products or services when needed.
What is Reverse Factoring?
Many people are familiar with traditional invoice factoring, a process in which a business with B2B invoices sells them to a factoring company. In these cases, the company submits their invoices in batches to the factoring company, the company provides them with a lump sum up front, and then the company collects payment for the invoices.
Naturally, reverse factoring leverages the same process, but it flows backward. Instead of the business with invoices approaching the factoring company, the business being invoiced does. This works well for companies which seek better terms or longer payment windows but would prefer not to take out a loan to cover the cost of goods or services.
Reverse Factoring History & Industries
Sometimes called supply chain factoring, reverse factoring started in the automotive parts and manufacturing industry. Today very, very few factoring transactions are reverse factoring arrangements. It is a business model that is rarely used, but it has its place.
It does offer financing options to companies that have not had access to funding, such as rapidly growing suppliers who need advances to help them grow.
Many more companies, across many industries, take advantage of traditional invoice factoring. When your company needs cash flow quickly, it’s time to reach out to a reliable, well-established factoring company. The process is fast and easy, regardless of your company’s credit history. Basically, factoring firms provide cash advances to you in return for your accounts receivable at a discount. This allows you to immediately have working capital that can be used to pay your workers, your suppliers, and debts. The factoring firm also takes on responsibility for collecting on the invoices and manages key bookkeeping tasks for its clients.
Invoice factoring in general is a method wherein a business batches their accounts receivable and sells them to a factoring firm at a discount. The percentage of this discount, or factoring rate, will depend on your circumstances and the creditworthiness and payment history of your customers. Reverse factoring works well with individual suppliers and customers, rather than large batches of invoices from many different customers. The factoring firm works to ensure that each invoice will be paid.
Need more information about reverse factoring? Contact Interstate Capital or click here for a free factoring assessment today: