How Reverse Factoring can benefit Corporate Supply Chains

Are you struggling to keep cash in your business?

Perhaps your relationships with your suppliers could be better?

Or perhaps you just want to reduce the supply chain risk associated with delivery interruptions from key suppliers?

If you answered ‘Yes‘ to any of the above, you should definitely keep reading.

Keeping cash in your company while maintaining a healthy supply chain is tough. But there is a highly effective way to achieve both! It’s called Reverse Factoring, and in this blog, we’re going to explain to you exactly how it works.

What is Reverse Factoring?

Reverse Factoring — also sometimes referred to as Supply Chain Finance — is a method of using third party finance to meet your supplier payment obligations. It works as follows:

Step One: You arrange for payment of your accounts payable to be financed by a financial institution.

Step Two: The financial institution early pays your suppliers, deducting a fee based on your credit rating and the days left until the invoice due date.

Step Three: You repay the financial institution when the invoices would normally be due or at a later date mutually agreed with the financial institution.

How can it benefit you?

Reverse Factoring creates a “win-win-win” situation.

The financial institution makes a good return on the money they invested.

Your suppliers get paid early, which improves their cash flow; and, because the cost of finance (the early payment) is based on your corporate credit rating, their effective cost of credit is often far cheaper than credit taken on their own account.

Your company, by using external finance for supplier payments, is able to delay cash outflows: lowering your working capital requirement (the amount of cash required to fund your business operations) and your associated financing costs. And, by strengthening the financial position of key suppliers, you strengthen your supply chain.

All of the above can be achieved with little or no direct cost to your company.

Final Thoughts

If your company has a strong buying power and a strong credit rating, a reverse factoring programme can be leveraged to enormous financial advantage.

If your company requires a significant amount of working capital, reverse factoring can significantly reduce that working capital requirement and support effective working capital management.

A well managed reverse factoring programme can deliver significant long-term benefits to corporates in all business sectors.

To find out more about how Reverse Factoring can benefit your business, contact Gii today!