Reverse factoring is a short-term financing solution tailored to fit the needs of suppliers that serve large customers. Through the intermediary of a “factor”, suppliers can obtain payment for their invoices before the contract deadline, using a “payment authorization” issued by the customer.
To implement this type of solution, the supplier and the factoring company sign a factoring contract. After the supplier provides the service, it issues its invoice to the customer as usual. The customer then processes the invoice and approves it as “authorized for payment” with the factor.
The supplier can then access a list of financeable invoices through a dedicated secure website. In just a few clicks, the supplier can request the early payment of invoices, if necessary. Financing is then arranged by wire transfer in a substantially shorter time frame.
That means the process is fully virtualized for each party in the program, which accelerates and streamlines the administrative process for everyone involved.
A system embraced by SME…
First thought up in the 1980s, reverse factoring has become common practice in the United Kingdom, Italy and especially in Spain, where reverse factoring accounts for half of all factoring activity, or 57 billion euros in annual cash flow.
In France, the system has proved slower to catch on. But while it only accounted for 5.1% of the total French factoring market in 2014, it is now becoming more common and seeing strong growth rates.
We can also note that small businesses are increasingly drawn to reverse factoring services, which represents a win-win system:
• For customers (buyers), by enabling them to secure their supply chains while improving supplier relations and optimizing management costs, notably by boosting the reliability of approval process for supplier invoices.
• For suppliers, as the technique allows them to receive fast financing at a highly beneficial rate after issuing a payment authorization, thus consolidating their payment deadlines and enhancing their cash flow management.
…and encouraged by the government
In times of financial crisis, when many small businesses face cash flow problems, reverse factoring can emerge as a prime solution. Last June, the French government notably announced its plan to develop these solutions. “The development and survival of VSE and SME may be threatened by periodic cash flow problems. Among the causes of such difficulties, the waiting period for inter-enterprise payments plays a crucial role”, according to the Tout pour l’emploi press release, published alongside the Prime Minister’s announcement of measures to stimulate employment at VSE and SME in June 2015. Measure 10 proposes to “develop financing solutions through inter-enterprise credit initiated by the customer (reverse factoring) in the context of inter-enterprise mediation discussions between suppliers, customers and financing companies”.
BNP Paribas Factor, the French leader in factoring – with over 18% of the market at the end of 2014 – has offered this service to its customers since 2011. The simple solution is notably accessible through a web platform available 24/7 to both buyers and their suppliers!