Suppliers and purchasers can benefit from reverse factoring in certain situations. But, as entrepreneur Anthony Zingarelli, leader of United LLC, explains, some businesses aren’t familiar with how this financing arrangement works.
Reverse factoring helps bridge the gap between suppliers and purchasers in the supply chain, providing much-needed financing. Below is a more detailed explanation of reverse factoring and how it can benefit your business.
Reverse Factoring Definition
Reverse factoring involves a third-party lender as an intermediary between suppliers and purchasers. It is similar to invoice factoring in other industries.
The lender, also known as the factor in this arrangement, will purchase all or some of the company’s outstanding invoices and then take over the responsibility of collecting the money owed on the invoices.
The factor will advance a certain amount of money to the company based on the outstanding invoices. Typically, this amount will range anywhere from 70% to 95% of the total outstanding amount of the invoices.
After the outstanding invoices are collected, the company pays the factor and a fee for advancing the money.
Reverse Factoring Benefits
There are many potential benefits to reverse factoring to both suppliers and buyers in the supply chain. Here’s a more detailed explanation.
Reverse factoring helps buyers improve their cash flow. By bringing in money much quicker than they might through typical collection practices, they will have the ability to reduce their DPO or days payable outstanding significantly.
This type of financing also helps curb disruptions in the supply chain. It’s no secret that the global supply chain is experiencing some significant disruptions right now, which has had massive effects on consumers and buyers. Reverse factoring can help hedge against these types of disruptions by having access to payments early.
Buyers can also offer reverse factoring to their suppliers, putting them in a better negotiating position against competitors.
One of the most significant benefits of reverse factoring for suppliers is accessing funding that’s lower cost than most other options. The funding suppliers can get is based on the buyer’s credit rating and not the supplier.
As such, suppliers typically are charged an interest rate lower than other available funding. This helps suppliers also improve their working capital, as they’ll be receiving payment on invoices early.
Anthony Zingarelli of United LLC says suppliers can then use that extra working capital and improved cash flow to invest in R&D (research and development) and expand the business in other ways. R&D is significant to suppliers and the overall supply chain.
Finally, reverse factoring provides stability and consistency for suppliers in cash flow, which allows them to forecast more accurately. This cash flow certainty will enable suppliers to make smarter business decisions based on when they’ll have extra cash on hand to invest in the company and when they might want to hold back from doing so.
About Anthony Zingarelli
Anthony Zingarelli is the founder of United LLC, an operations management solutions firm located in Dallas, Texas. Zingarelli relies on his expertise in operations management to help companies and startups experience tremendous growth by securing financing, building business plans (including exit strategies), and recruiting key personnel and resources.