Reverse factoring or supply chain financing is a financing solution initiated by the ordering party to help his supplier finance their receivables more easily and at a lower interest cost than what would normally be offered. Reverse factoring is unlike traditional invoice factoring, where a supplier wants to finance his receivables. The reverse factoring market is still very small but is growing at a high rate.
Reverse Factoring has become important because of the growing need for companies to access the working capital that’s locked up in their supply chains. It allows companies to have longer payment terms with certain suppliers while also allowing them to pay larger suppliers early. It’s an optimization of working capital. Interest is reduced because the larger orders can be paid first. It also allows businesses to cash in on potential discounts for paying early from the larger suppliers, on the larger orders. The result is that the buyer has created additional working capital and the risk for all suppliers is minimized.
WIP Funding can help a business with its Reverse Factoring needs. Reverse Factoring is not considered a loan or financial debt since it represents a true sale of their receivables. It also does not require a bank and a company doesn’t have to be large for Reverse Factoring to benefit.