And then, the supplier will themselves choose which of these invoices he will need to be paid by the factor. This time, it is the ordering party (customer) that starts the process – usually a large company – choosing invoices that they will allow to be paid earlier by the factor. Ĭontrary to the basic factoring, the initiative is not from the supplier that would have presented invoices to the factor to be paid earlier. Just as basic factoring, the aim of the process is to finance the supplier's receivables by a financier (the factor), so the supplier can cash in the money for what they sold immediately (minus an interest the factor deducts to finance the advance of money).
The reverse factoring method, still rare, is similar to the factoring insofar as it involves three actors: the ordering party (customer), the supplier, and the factor. In 2011, the reverse factoring market was still very small, accounting for less than 3% of the factoring market. Unlike traditional factoring (where a supplier wants to finance its receivables), supply chain financing is initiated by the ordering party (the customer) in order to help its suppliers to finance its receivables more easily and at a lower interest rate than what would normally be offered. Also it refers to the techniques and practices used by banks and other financial institutions to manage the capital invested into the supply chain and reduce risk for the parties involved. Supply chain financing (or reverse factoring) is a form of financial transaction wherein a third party facilitates an exchange by financing the supplier on the customer's behalf.
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