Supply chain finance, often called reverse factoring, is a financing program set up by a large buyer for its suppliers. Once the buyer approves a supplier's invoice, a bank or other financier offers to pay the supplier early. The buyer then pays the financier on the invoice's due date.
How it works in factoring
The key difference from traditional factoring is who starts the arrangement:
| Traditional factoring | Reverse factoring | |
|---|---|---|
| Who sets it up | The supplier (seller) | The buyer |
| Credit relied on | Mostly the buyer, assessed by the factor | The buyer's own credit |
| Invoice approval | Verified by the factor | Confirmed by the buyer on a platform |
| Supplier coverage | Any customers the factor approves | Only that buyer's invoices |
Because the buyer has confirmed it will pay, and the cost is based on the buyer's credit, early-payment pricing can be attractive to suppliers. Buyers use these programs to support suppliers while sometimes extending their own payment terms.
Accounting standard setters have added disclosure requirements for supplier finance programs, because the arrangements can affect how a buyer's payables and cash flow are presented.
What to check
- Whether joining is optional and whether your payment terms change if you decline
- Discount pricing and how it might change if the buyer's credit changes
- Conflicts with an existing factoring agreement, since those receivables may already be assigned
- What happens to your access to early payment if the program ends
Reverse factoring covers only invoices from the sponsoring buyer, so it rarely replaces a full factoring relationship.