Almost all businesses face cash flow at some point due to supply chain issues. Reverse factoring allows contractors to access the working capital they need when they need it. Financial institutions benefit in many ways from reverse factoring agreements. It helps develop long-term sources of cash flow through interest payments made by suppliers. These sources of revenue can be extremely profitable for financial institutions for long periods of time. The following week, Big Cheese Ltd made a big contract for some milk that Ms. Jones of Cowabunga Dairy Farm was happy to fill. If she sends your invoice to Mr. Smith, Ms.
Jones can either wait until the usual 30 days to be paid, or get a prepayment through Mr. Smith`s reverse factoring agreement with his financial company. Traditional factoring works on the basis of a company`s financing for its receivables. Conversely, supply factoring is a solution in which the buyer helps his suppliers by offering his receivables more flexibly and at a lower interest rate. As a market share; Reverse factoring accounts for less than 5% of the factoring market. The size of the reverse factoring market is relatively small (about 3%) Factoring market share. The Aite Group estimates that the size of the reverse factoring market was between $255 billion and $280 billion in 2015. The main advantage of reverse factoring for suppliers is that they can be cancelled in 10 days instead of the typical rotation of 30-45 days. This helps to optimize cash flow and gives them access to much-needed labour capital. On the other hand, Ms. Jones of Cowabunga Dairy Farm needs quick and reliable payments from her buyers to access the working capital she needs for her business (cow and other purchases).
If buyers don`t pay in time, their financial situation becomes chaotic. Thus, if Mr. Smith of Big Cheese Ltd. proposes a reverse factoring system, he agrees to try it. Despite the fact that reverse factoring is used in many different sectors, it remains a relatively rare method of financing. It is estimated that reverse factoring could handle about 25% of trade finance. But right now, reverse factoring accounts for only about 3% of global trade finance. To fully understand how the reverse factoring process works, you need to be familiar with commercial discounts and factoring. Indeed, reverse factoring could be seen as a combination of these two methods, with benefits that could be used to redistribute benefits between the three players. To better understand the process, it is necessary to examine the 8 individual aspects of these three financing methods: At CreditDigital, we take all that is great on reverse factoring and we eliminate any inefficiency to offer buyers and suppliers a financing option that is always easy to use. To learn more and get started, visit our supplier portal or customer portal.
At this point, you may have noticed that reverse factoring is relatively complicated.