What is reverse factoring?
Businesses seeking reverse factoring solutions for supply chain financing can partner with Viva Capital for buyer-initiated financing programs that extend payment terms while offering suppliers early payment options. With over 20 years of experience as an independently owned finance company, Viva Capital provides no-cost solutions for buyers, competitive nominal discount rates for suppliers, bilingual account support, and streamlined third-party agreements. Our reverse factoring program maximizes working capital for buyers while delivering stable cash flow to suppliers.
How Reverse Factoring Works as a Supply Chain Finance Program
A conventional factoring service targets the supplier instead of the business/debtor, while reverse factoring targets the business/buyer. Reverse factoring is one type of supply chain finance program; it is the buyer-initiated version, in which the buyer establishes the financing arrangement on behalf of their suppliers.
A reverse factoring company can streamline the supply chain for both the business/buyer and the supplier, meaning both parties can benefit. Reverse factoring is available at no additional cost to the business/buyer and at little cost to the supplier.
By working with Viva Capital, your business will gain a competitive advantage by maximizing its working capital,
as well as providing a solution to your suppliers by offering a stable and consistent cash flow opportunity with Viva’s quick pay option.
What Is the Difference between Reverse Factoring (Supply Chain Financing) & Invoice Factoring?
Unlike traditional invoice factoring, the supplier aims to finance their receivables without any involvement or benefit to the business/debtor—reverse factoring is initiated by the ordering entity/buyer. This means companies such as yours may support their suppliers’ financing needs by allowing the supplier to elect an early payment option, known as Viva’s quick pay option.
How Does Reverse Factoring Work?
1. The finance company & buyer collaborate and create an agreement.
A funder, also known as a finance company, engages in a third-party agreement with a buyer, allowing all the suppliers associated with that buyer to take advantage of a quick pay or early payment option. The funder would charge the supplier a nominal discount for that early payment option for each invoice selected for quick pay.
2. The finance company & buyer establish when the payment is due.
The funder establishes agreed-upon payment terms with the buyer, which would require the buyer to pay the full amount of the invoice at the determined due date.
3. The reverse factoring process is complete and can be repeated as many times as needed.
After all the payments have been collected, the cycle is complete. The supplier is eligible to elect quick pay on more than one accounts receivable invoice at a time, at which time the process would repeat itself.
Reverse Factoring Benefits & Applications
Reverse Factoring Benefits and Advantages for Businesses/Buyers
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- Cash flow Improvement – Not only does your business maximize working capital, but your suppliers’ need for an early payment option doesn’t impact your cash flow.
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- Reduced early payment requests – Your team will no longer receive as many early payment requests from your suppliers. Suppliers will be paid the same day your company approves the supplier’s invoice in Viva’s quick pay program.
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- Supplier financing – Help out your suppliers by making it easier for them to select the specific invoices they want to be paid early.
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- Buyer Rebate – The buyer becomes eligible for a monthly rebate from Viva’s quick pay fee collected from the suppliers.
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- Nominal discount fee to suppliers– The funder charges a small discount fee to suppliers per invoice in the quick pay program based on the trade credit of the buyer/debtor, which is typically better than the suppliers’.
Reverse Factoring Benefits and Advantages for Suppliers
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- Nominal discount fee – The funder charges a small discount fee based on the trade credit of the buyer rather than that of the supplier.
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- Better cash flow – The funder pays the invoice to suppliers much faster than it would typically be paid, usually within 24 hours from buyers’ approval of the invoice.
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- Dispute reduction – Suppliers no longer need to be concerned with non-payment and fraudulent invoices because a third-party financial partner is involved, and all invoices are agreed upon beforehand.
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- Reduction in administrative work – You will spend less time dealing with payments, managing invoices, and cash flow shortfalls.
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- Supplier financing – It is easier for you to select the invoices you want to be paid faster under Viva’s quick pay program.
Reverse Factoring Applications
While many different types of businesses would benefit greatly from reverse factoring programs, it is often most effective for large middle-market businesses. The industries that benefit the most are construction, manufacturing, and oil and gas.
We are experienced in working with a wide range of industries, including:
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- Construction
Frequently Asked Questions About Reverse Factoring
In traditional factoring, the supplier initiates the process by selling their unpaid invoices to a finance company to access early payment. In reverse factoring, the buyer initiates the program, and the finance company pays the supplier based on the buyer’s creditworthiness rather than the supplier’s. This means reverse factoring typically carries a lower discount fee for the supplier and involves a formal agreement between the buyer and the finance company before any invoices are submitted.
A reverse factoring agreement is a third-party contract between a buyer and a finance company that governs how suppliers access early payment. The buyer and finance company establish the program terms, including approved suppliers and payment timelines. Once the agreement is in place, enrolled suppliers can elect early payment on specific approved invoices at any time, without requiring a separate approval process for each transaction.
The supplier pays a nominal discount fee, which is calculated based on the trade credit of the buyer rather than the supplier’s own credit history. Because large buyers typically carry stronger credit profiles, this fee is generally lower than what a supplier would pay through traditional factoring. There are no costs to the buyer under Viva Capital’s reverse factoring program.
Once a buyer approves a supplier’s invoice through the program, the finance company typically pays the supplier within 24 hours. The speed of payment is one of the primary reasons suppliers elect the early payment option, as it eliminates the uncertainty of waiting 30, 60, or 90-day payment terms while still allowing the buyer to settle on their original schedule.
Reverse factoring works best for large middle-market buyers that have multiple suppliers and want to support those suppliers’ cash flow without affecting their own accounts payable process. Suppliers benefit most when they regularly fulfill large orders for buyers with strong credit, as the buyer’s credit profile directly determines the discount fee the supplier pays to access early payment.