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Reverse factoring
Also called supply chain finance, supplier finance, payables finance, approved payables finance.
A program set up by a large buyer allowing its suppliers to be paid early on approved invoices at a cost based on the buyer's credit rather than the supplier's.
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What it means
The buyer initiates it, which is the structural inversion the name refers to. The buyer approves an invoice for payment at its normal maturity, and a funding platform offers the supplier immediate payment less a discount. The buyer pays the funder in full on the original due date.
Pricing keys off the buyer's credit standing, so a small supplier selling to a large investment-grade customer can access cheaper money through the program than it could obtain on its own balance sheet. For the buyer, the program supports supplier stability and sometimes allows extended payment terms without damaging the supply base.
The supplier gives up a discount and takes on a dependency: the program covers only that buyer's invoices, the buyer controls approval, and the facility can be withdrawn. Accounting treatment of these programs on the buyer's side - whether the obligation remains a trade payable or becomes debt - has drawn regulatory and standard-setter attention, and disclosure requirements have tightened.
Where this one catches people
Nothing to do with reverse consolidation, despite the near-identical name. One is a buyer-led early payment program for suppliers of large corporates; the other is a distressed-debt servicing structure in the advance market. The confusion is common enough in broker conversations that it is worth asking directly which product is being described.
Where you will meet this term
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Reverse factoring — common questions
What does reverse factoring mean?
A program set up by a large buyer allowing its suppliers to be paid early on approved invoices at a cost based on the buyer's credit rather than the supplier's.
Where does reverse factoring catch people out?
Nothing to do with reverse consolidation, despite the near-identical name. One is a buyer-led early payment program for suppliers of large corporates; the other is a distressed-debt servicing structure in the advance market. The confusion is common enough in broker conversations that it is worth asking directly which product is being described.
Is reverse factoring the same as an interest rate?
No. It is a multiplier applied once to the amount funded, with no time dimension. An interest rate is charged per unit of time on a balance that changes.
Which products does reverse factoring apply to?
Working Capital, Invoice Financing.
Is there a worked example of reverse factoring?
Not on this entry. Where a term is arithmetic, the arithmetic is shown; this one is not primarily a calculation.
What else should I read alongside reverse factoring?
Invoice factoring, Net 30, Obligor, Purchase order financing, Receivable.
Has this definition been checked?
Not yet. This entry is drafted and live, and the notice at the top says so. Confirm anything you are about to act on.
Is this legal advice?
No. It is a definition. What a clause does in your contract, in your state, is a question for a lawyer licensed where you are.
Can I suggest a term?
Yes — [email protected]. The glossary grows from what people are actually shown in contracts.