Reverse factoring is a buyer-led financing solution that allows suppliers to receive early payment on approved invoices, based on the buyer’s credit profile rather than the supplier’s. It improves supplier liquidity without changing existing commercial terms, while giving buyers greater control over payment timing and working capital strategy.
What It Is #
In a standard payment cycle, suppliers wait 30, 60, or even 90 days after delivering goods or services before receiving payment. This creates cash flow gaps that limit their ability to invest in operations, hire staff, or take on new orders.
Reverse factoring solves this by introducing a financing partner into the payment chain. Once the buyer approves an invoice, the financing provider pays the supplier early at a small discount. The buyer then settles the full invoice amount with the provider on the original due date.
The key distinction from regular factoring is who initiates the arrangement. In factoring, the supplier sells its invoices independently. In reverse factoring, the buyer sets up and anchors the program, which means financing is priced against the buyer’s creditworthiness — typically stronger and cheaper than the supplier’s own credit profile.
How It Works #
- Supplier delivers goods or services and issues an invoice with agreed payment terms (e.g., net 90).
- Buyer approves the invoice, confirming it is valid and payable.
- Supplier requests early payment, choosing which approved invoices to finance and when.
- The financing provider pays the supplier within 1–5 business days, minus a small discount fee.
- Buyer pays the financing provider the full invoice amount on the original due date.
The supplier chooses when and whether to request early payment — there is no obligation to use the program on every invoice.
Buyer vs. Supplier Perspective #
| Aspect | Buyer | Supplier |
|---|---|---|
| Payment timing | Unchanged — pays on original due date | Accelerated — receives cash within days |
| Credit used | Buyer’s credit profile anchors the program | No credit check required |
| Cost | No direct cost; may negotiate extended terms | Small discount fee on early payment |
| Working capital | Maintains or extends DPO | Reduces DSO, improves cash flow |
| Relationship | Strengthens supplier loyalty | Reduces financial stress |
How It Differs from Regular Factoring #
| Dimension | Reverse Factoring | Factoring |
|---|---|---|
| Who initiates | Buyer | Supplier |
| Credit basis | Buyer’s rating | Supplier’s rating |
| Invoice approval | Required before financing | Not always required |
| Cost to supplier | Lower (buyer’s credit) | Higher (supplier’s credit) |
| Buyer awareness | Always involved | May not be notified |
Key Benefits #
- Lower financing costs for suppliers, since rates reflect the buyer’s stronger credit profile
- Extended DPO for buyers without harming supplier cash flow
- Supply chain stability — financially healthy suppliers deliver more reliably
- Voluntary participation — suppliers use it only when it makes sense for them
- No balance sheet impact for buyers when structured correctly under IFRS