![]() ![]() We have covered the meaning and workings of supply chain finance in this post separately. Since the cost of this facility depends on the buyer’s credit rating, it is usually lower than what the supplier could have secured on its own. The buyer company sends the payment to the financier on the invoice maturity date.īuyers give suppliers access to reverse factoring and reduce the risk of disruption in their supply chains, thus strengthen their relationships with the suppliers and at the same time improve their own working capital position. The suppliers participating in the reverse factoring program can request early payment on invoices from the financiers. Instead of these small suppliers having to arrange their own facilities, the large debtor creates a facility where financiers can draw comfort from the buyer's credit profile and suppliers enjoy lower interest rates. Usually, large companies arrange with financiers to provide factoring services to some or all of their suppliers. Reverse factoring, is a way of factoring in finance that enables large companies to offer early payments to their suppliers based on approved invoices. Since it also helps keep the supply chain run smoothly without any hindrance, it is also used synonymously with supply chain financing, however, there is no official definition of supply chain financing and it is a much broader international trade finance term that encompasses several different financing techniques. Since the buyer approves the financing against accounts payables, it is synonymously referred to as payables financing. The financier in this transaction is called the factor. Reverse factoring is a method of financing where the buyer (importer) makes provision for a financing arrangement wherein a supplier (or exporter) can choose to receive an early payment on the invoices it draws against the buyer/importer for a small fee and collects payment from the buyer at a later due date. ![]()
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