Some people think that reverse factoring is the same as invoice factoring, but both are different from each other in various aspects. Reverse factoring helps in funding invoices for the suppliers. It can be seen as a downstream funding approach rather than an upstream approach, i.e., funding buyer invoices, as it is seen in traditional factoring. Because of this reason, reverse factoring is also called supply chain factoring.

Invoice factoring is useful where a company requires cash and can obtain an advance on its invoices with the help of a factoring company. The company which opts for raising funds with the involvement of the factoring company then should advance a certain percentage of the invoices’ value to the factoring company.

Reverse factoring or supply chain finance works in the opposite direction of invoice factoring. Rather than using a company factoring customer invoices, it factors supplier invoices. Reverse factoring is a creditor remedy for the companies opting for it.

Reverse factoring helps the suppliers to be paid rapidly for a payment that is taken care of between large retailers and banks.

Types of reverse factoring include:

• Cash flow from the business or lenders
• Bill funding
• Bill discounting
• Import factoring
• Structured funds

Here are a few advantages of reverse factoring:-

• Usually, reserve factoring is an easy system set up, which includes lower costs involved for the supplier. The reason is due to the funders taking credit risk on the vast corporate compared to the minor supplier. The financier behind a scheme may also charge the supplier a couple of per cent of their funding line, to join the reverse factoring scheme.

• The availability of reverse factoring means that it can provide significant funds to previously unapproachable companies. Rising suppliers can accept funding quickly, which helps to boost their expansion and prevent any possible bankruptcy situations in the future. It is also seen that reverse factoring can be adequate than formal factoring agreements.

• Reverse factoring functions where a funder stands deals with the company and its suppliers; it has the responsibility to fund the company’s invoices from suppliers at a rapid rate given by a company that too in exchange for a discount.

• Formal factoring works on the basis that businesses can obtain finance from their receivables. On the contrary, reverse factoring or supply chain financing is a result where the buyer encourages his suppliers by funding on their receivables utilizing a more adaptable method at a lower interest rate than offered outside.

The key advantages of reverse factoring are:-

• The funders liability is mainly focused on substantial creditworthy companies,

• This shows that the funder need not worry about any fraud or scheming of the invoices.

• There should be transparency among all the parties about knowing when they will receive the revenue, which avoids massive or unnecessary delays.

• Conflicts can be neglected as if both sides have agreed on the bill.

• Helpful in reducing the supplier’s cash flow along with this, it manages invoices appropriately.