Supply chain financing (SCF), also known as reverse factoring, is a practical, debtless way to manage your company’s cash flow. Cash flow problems are common among even well-established businesses. Poor cash flow can damage relationships with clients and suppliers and possibly signal a company’s downfall. In their urgent need to do damage control in the event of cash flow issues, companies often resort to high-interest bank loans or to liquidating assets or inventory. Solutions such as supply chain financing are hassle-free alternatives that allow you to fill gaps in your cash flow quickly, without having to incur debt or part with valuable assets. This article will tell you all you need to know about SCF and why you should not hesitate to use it to smooth over those periodic cash flow shortages.

What is supply chain financing?

SCF or reverse factoring is a supplier finance solution in which companies can offer early payments on approved invoices to their suppliers, using the financial institution as an intermediary. The lending institution – or factor – advances the early payment to the supplier and then collects payment from the buyer on the maturity of the invoice. By giving your suppliers access to reverse factoring, you can prevent any possible disruptions in your supply chain. It is a financing option that helps your key suppliers to fill gaps in their cash flow to ensure that they can continue to supply to you. It also indirectly enables you to maintain your own working capital position.

How does reverse factoring differ from invoice factoring?

Invoice factoring is a popular cash flow financing solution, which can easily be confused with reverse factoring. However, as the name suggests, reverse factoring works the other way around from invoice factoring. With invoice factoring, a supplier sells their receivable invoices to the factor, who advances a certain percentage of the total value of those invoices, and then takes charge of collecting payment from the supplier’s debtors. Once payment is collected, the factor takes their fee and pays any outstanding amounts to the supplier.

With reverse factoring, it is the buyer rather than the supplier that initiates the process. The buyer offers to make early payment on invoices it has received from the supplier. The factor advances the payment on the buyer’s behalf and then collects the payment from the buyer at a later stage. In this way, the buyer can still pay the invoice on the stipulated payment terms, while the supplier can receive settlement on that same invoice earlier, helping it to ease up its cash flow and keep the supply chain moving.

How does reverse factoring work?

Reverse factoring is an ongoing three-way relationship between a buyer, a seller, and a factoring company. There are several steps in the reverse factoring process:

First, the buyer purchases goods from the supplier.
Typically, the supplier would then issue an invoice for the goods, indicating specific payment terms, such as 30 days. When an SCF arrangement has been set in place, the supplier instead uploads the invoice to the reverse factoring platform operated by the factoring company.
The buyer approves the invoice and the seller requests early payment.
The factor settles the invoices with the supplier, minus its factoring fee.
On the stated maturity date of the invoice, the buyer pays the full amount of the invoice to the factoring company.

The benefits of reverse factoring

SCF or reverse factoring benefits both the supplier and the buyer in a number of ways:

Improved cash flow: The main benefit is that reverse factoring helps to prevent breakdowns in cash flow. The supplier receives early payment on its invoices and so does not have to wait for accounts receivable. The result is increased cash flow and better cash flow management and better financial health.

Fewer early payment requests: Once reverse factoring has been activated, businesses will stop receiving requests for early payment from their suppliers. With the agreement in place, the supplier can request early payment from the factoring company, and the buyer can continue to pay on the usual terms.

Fewer disputes: Businesses will deal with fewer disputes with their suppliers, because a third party is involved.

Fast payment: Suppliers get to enjoy early settlement of their invoices, reducing long delays.

Less admin: With a factoring agreement in place, businesses will spend less time chasing payment and managing invoices. The reduction in administrative tasks means that the company can use its resources for more constructive purposes.

Low interest rates: Bank loans incur considerable costs in the form of interest. Factoring companies charge lower interest and what it does charge is based on the creditworthiness of the buyer, rather than the supplier.

Foster relationships: Without a reverse factoring arrangement, relationships between buyers and suppliers can quickly fall apart in the event of late payment or non-payment. When there is a factoring agreement in place, this is not an issue, so the two parties can develop long-term relationships, which can only benefit their business and supply chains in the long run.

Improved working capital: Working capital flows are enhanced for both the supplier and the buyer. The suppliers lower their days sales outstanding (DSO) and accelerate their cash flow and improve their working capital position. Buyers get to increase their days payable outstanding (DPO). When setting up reverse factoring agreements, they can even make provisions to pay invoices later than the supplier’s stipulated terms.

Reduced risk of supply chain disruption: Buyers can use their factoring agreement to reduce the possibility of interrupting their supply chains. Suppliers are less likely to struggle to meet orders if they have access to early payments.

Stronger negotiating position: If a buyer offers reverse factoring options, it can put them in an excellent position to negotiate better trade terms with their suppliers.

Better cash forecasting: Suppliers can enjoy better predictability of future payments, making it easier to forecast their cash flows.

Who uses supply chain financing?

Businesses in all sectors can benefit from supply chain financing. It has become a preferred method of financing for businesses on both sides of the supply chain. Whether you deal in electronics, FMCGs, textiles, or almost any other products, you can enjoy the benefits of reverse factoring either as a supplier or a buyer.

Which suppliers should you offer reverse factoring?

As a buyer, you may wonder which of your suppliers you should invite to enter into a reverse factoring agreement with you. There are at least two different ways you can approach an answer to the question. Traditionally, buyers only offer this option to their top 10 to 20 suppliers. The main reason for this limitation is that it tended to require a substantial administrative effort to onboard suppliers onto an SCF program.

However, the administrative costs of reverse factoring are not as heavy as they used to be. Technology has made the process much easier. It is now possible for a company to add its entire supplier base to its reverse factoring program, which means that even smaller suppliers can enjoy the benefits of SCF, to which they may not normally have access.

Viva Capital’s SCF program

Viva Capital Funding is a factoring company based in El Paso, Texas. In addition to invoice factoring, short-term financing, equipment financing and other financial services, we offer an easy reverse factoring service that will give you and your suppliers all the benefits described above. We serve a wide variety of sectors, including healthcare, staffing, transportation, manufacturing, service providers, and a specialized skill set for the oil industry.

If you would like to access these benefits and offer reverse factoring to your suppliers, contact Viva Capital Funding today.

All you need to know about supply chain financing