Reverse factoring is usually begun by large companies that want to improve the cash flow situation for their suppliers. It is rarely used by one-time suppliers, since some setup time is required to bring a new supplier into a company’s reverse factoring system. Reverse factoring is typically available to those suppliers with which a company has established a long-term trading relationship. This can represent an excellent source of income over a long period of time, so bankers try to create sole-source reverse factoring arrangements to lock it in.
The finance company acting as the intermediary earns interest income on the factoring arrangements that it enters into with the suppliers of the target company.
The interest rate charged by the finance company should be low, since it is based on the credit standing of the paying company, not the rating of the suppliers (which assumes that the payer has a good rating). Reverse factoring has the following benefits for suppliers:Ī cash-strapped supplier can be paid much sooner than normal, in exchange for the finance company's fee.
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