Factoring is an operation for the sale (assignment) of a receivable to a supplier of a factor company, carried out with the objective of immediately receiving cash and providing liquidity. Usually, a portfolio of debts is transferred to the factor company, which is associated with additional risks and the need for a thorough analysis of the position of each debtor. Reverse factoring is, according to the authors, a less expensive liquidity scheme for the supplier. First, reverse factoring is focused on the buyer and, accordingly, the laboriousness of analyzing information about debtors is reduced, which allows reducing the cost of the operation. Secondly, since the companies that carry out investment activities often become buyers, the risk is significantly reduced and it becomes possible to lower interest rates.

Smart Options for the Proper Results

In short, the reverse factoring scheme looks like this. The buyer sends the order to the supplier and notifies the factoring company (usually the bank acts as a factor). Further, the supplier provides relevant documents to the company-factor, which conducts the audit and notifies the buyer. The buyer agrees or disagrees with the terms, about which the supplier receives notification. If the supplier requests payment without delay, the factor credits its account. At maturity, the factor debits the buyer’s account.

The Right Custody

However, the authors say, the chain of custody financing scheme has not received adequate distribution, which they relate primarily to the lack of confidence in its advantages and reliability. According to the results of these studies, in companies that applied the reverse factoring scheme, the working capital was reduced by an average of 13%. Suppliers of reverse factoring ensured a reduction in working capital by an average of 14%. Effective use of the chain of custody financing scheme involves the use of special software, investments into which, according to the calculations of the researchers, are repaid repeatedly in the first year of use.

Proper Results for the Reverse Factoring Now

In addition, reverse factoring has also positive aspects such as standardization of terms of payment (57% of respondents noted), improvement of relations with consumers (52% of respondents), improvement of processes covering the placement of orders, purchases, acceptance, payment and accounting of goods and services (68% of respondents), improvement of the chain of processes from order to payment of goods (14% of respondents), as well as from registration to reporting (14% of respondents).

Any change, however beautiful it may be at the level of the idea, must be correctly implemented to bring the expected positive changes. The authors identify three main factors responsible for the success of the introduction of the supply chain financing system.