Reverse factoring or supply chain financing is a supplier-payment management service whereby the bank may offer to pay invoices before they are due.
The purpose of this service is to pay invoices before their due date or to offer financing. It is often used by companies needing to manage a wide range of suppliers, wishing to defer payments, or which have complex payment systems.
- With reverse factoring, the bank guarantees the customer’s payments to its suppliers, in a similar to paying with certified funds. The bank therefore opens a reverse factoring line of credit up to a specific credit limit, and handles supplier payments. The fees and expenses charged, together with interest on the capital used to pay the suppliers, are defined in the credit facility agreement.
- The bank writes to suppliers to inform them that the invoiced amount is available and offers the option of collecting payment at maturity or in advance, under the conditions agreed by the paying company and the bank. The bank may charge the supplier a prepayment fee as well as interest from the date of the advance until the invoice due date.