What you need to know about reverse factoring

To ensure their liquidity and optimize their cash management, companies can use a variety of solutions. Among them, reverse factoring is not the most common, but it can nevertheless be considered in certain cases because of the advantages it brings. What is it? What is the purpose of this financing solution? How does it work? The answers in this article.

Reverse factoring: definition and operation

Definition of reverse factoring

Reverse factoring is a financial management technique offered to companies to settle their supplier accounts before the due date, without using funds from their treasury. It is therefore an alternative payment method that is becoming more and more widespread. However, it is a solution that is mainly used by large groups, purchasing groups or purchasing departments.

Principle and functioning of reverse factoring

Reverse factoring offers companies the opportunity to pay their invoices to suppliers without using their cash flow and before the due date. Indeed, the factoring company takes care of the payment of the suppliers' invoices quickly after the goods have been delivered or the service has been performed. In other words, reverse factoring makes it possible to finance invoices without immediately drawing on the company's cash flow. Unliketraditional factoring, this payment solution is requested by the customer himself, and not by his suppliers.

Reverse factoring depends on several stakeholders. It is a tripartite contract that includes

• A client: the company ;
• A supplier: the one who holds the receivables of his customer;
• A factoring company: this financial institution is recognized as a credit institution by the Bank of France. It distributes the company's cash in exchange for an invoice.

Reverse factoring works in several stages:

1. The supplier sends the invoice to the client company;
2. Upon agreement of the suppliers, the invoice is then sent to the factor by the client company;
3. Suppliers pay the factor after the cash discount has been deducted;
4. The factoring company takes the place of the debtor on a temporary basis, in return for a commission: the discount is thus paid by the factoring company to the client company;
5. Suppliers' invoices are paid to the factoring company on the due date by the client company and according to the agreed payment terms.

How can reverse factoring allow companies to better control their cash flow?

The advantages of reverse factoring are numerous. This payment solution optimizes companies' cash flow management, since it allows them to retain liquidity for a longer period of time.

Another advantage: reverse factoring allows the client company to negotiate a discount with its supplier in exchange for immediate payment by the factor. This discount is often higher than the cost of the factoring procedure (i.e. the amount of the commission paid to the factor). For the client company, as well as for the supplier, it is therefore an interesting solution.

How does reverse factoring help to avoid late payments?

As the debtor is paid by the factor on time, he is no longer confronted with late payments.

What are the main drawbacks of reverse factoring?

Reverse factoring is practical, but it also has its drawbacks. Unlike traditional factoring, it is not the supplier who bears the cost of reverse factoring, but the client company.

Moreover, the guarantees required by the factors do not generally allow SMEs to use reverse factoring.

In conclusion, reverse factoring makes the invoicing process of companies more fluid. It generates better gains in terms of operational costs and productivity.

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