What is reverse factoring and what you should know about it?

There are a lot of businesses out there that are embracing and using factoring from banks or other financial institutions. The service is great for businesses of all sizes because it helps manage cash flow, avoids inconveniences due to delayed payments and guarantees much more efficiency for your day-to-day operations. But what about reverse factoring? What exactly is it and what are the things that you should know about it?

General overview

Reverse factoring is a financial service when a buyer can provide early or pre-arranged payments for services in advance or very quickly after they have been delivered. Opposite to regular factoring, this works in the contradictory direction, the supplier gets paid quickly. There has to be an intermediary between the buyer and the supplier. The intermediary will pay the money to the supplier quickly while the ordering party will deal with the bank/other financial institution that procures reverse factoring.

In the world of business, reverse factoring can also be called supply chain financing. But in the world of finance terminology, the latter term could mean more than just reverse factoring and actually covers quite a lot of different services.

Businesses turn to reverse factoring in order to preserve the balance of their supply chains. If the suppliers are guaranteed quick or even immediate payment, the buyer could negotiate better delivery terms, lower rates, etc. It is a mutually beneficial situation when both the supplier and buyers can be happy with the outcome.

How does supply chain financing (reverse factoring) work?

A lot, of course, will depend on the financial institution that provides reverse factoring. A bank or other organisations like payment solution providers can interpose between the buyer and their suppliers. However, if there is a right platform, the buyer and supplier can make a direct agreement on reverse factoring where they both exchange the necessary data on a particular platform or just do it according to individual terms.

The process begins with the purchase of goods or services. From then, it’s fairly simple:

1. The supplier generates an invoice and shares it with the buyer. They could upload it, send it directly or choose another way that’s already arranged.
2. The buyer contacts the bank or other financial institution to get an approval on the payment.
3. If the financial organisation agrees, the payment is carried out for a fee.
4. The supplier receives the payment (minus the fee) and the buyer has until the due date to cover the expenses made by the bank or financial institution. The sum can be paid back in full at once or by instalments.

How to simplify the management of these operations for your accountants?

As you can see, there is a lot of back-and-forth communication that goes on in the midst of supply chain financing (e.g. reverse factoring). This is why accountants or even entire accounting teams can have their fair share of struggles trying to cope with all of the new payment documents and transactions.

This is why a tool like a specific reverse factoring calculator can help you out. Special documents on Microsoft Excel can help simplify the workload of an accountant. But, if your business is dealing with reverse factoring operations quite often, a calculator won’t cut it. You have to opt for dedicated accounting software that is compatible with factoring business operations.

Dedicated factoring software for accountants is definitely a worthwhile investment because it simplifies the job of the accountant by giving him or her all of the right tools and assets to properly manage data and overlook numbers. The very best accounting software offers seamless and fast document import and integration thanks to automated document management. This way you can automate much of the paperwork that needs doing. When choosing the software, clients should definitely seek for solutions that offer extensive data gathering and tracking. You need to be able to quickly access and generate data charts and calculate the totals, DPO and other figures for factoring-related operations.

Finally, don’t forget that since there are a lot of software options to choose from, look for something that has user-friendly interface. Your accounting team shouldn’t spend too much time trying to get the hang of the app. The transition to or the addition of new factoring accounting software should be smooth and fuss-free.

What are the benefits of doing reverse factoring?

If we talk about reverse factoring, we, of course have to cover the pros and benefits of this financial service. There are quite a few reasons why businesses could consider doing reverse factoring. There are definite benefits for both involved parties, but let’s look at the benefits for the buyer first, and we’ll then focus on pros for the supplier.

So, to begin with, every buyer that uses reverse factoring can benefit from having a much lesser risk of supply chain disruptions. They won’t be needing to deal with upset suppliers who demand immediate payment. Besides, suppliers will be much happier and more eager to fulfil your order because of the immediate payment. This provides room for the buyer to get better terms, lower rates, etc. Reverse factoring also poses as an excellent measure in building lasting partnerships because on-time payments build mutual trust and friendly relations.

For suppliers it gives more freedom to manage cash flow. They can allocate the funds to areas of need and receive funding for much lower interest than when they choose other financing options.

Summary

So, to sum up – reverse factoring is a business operation when the invoices of the supplier are paid very early. A bank or financial institution provides payment for invoices and allows both buyers and sellers to benefit from having more financial freedom and guarantees for short and sometimes even long-term stability. Factoring and reverse factoring accounting software speeds up processes and simplifies almost every related task. Purchasing dedicated software definitely will make the work of an accountant a lot easier.