Is reverse factoring true factoring?

At one point, reverse factoring became more and more popular, especially in the segment of small and medium-sized enterprises, where it was an alternative to working capital loans. For the record, reverse factoring is nothing more than financing the entrepreneur's liabilities towards the supplier. The scheme looks similar: the entrepreneur submits the purchase invoice to the system – however, in this case, 100% of the funds are transferred to the supplier.

This solution has many advantages. One of them is the possibility for the entrepreneur to obtain a discount for early payment to the supplier. For example, the entrepreneur must pay for the delivered raw materials or materials, e.g. after 60 days following the payment date on the invoice. The alternative of paying for the goods as early as 1 day may be tempting for the supplier and constitute some form of negotiation, e.g. a 2% discount for early payment. The benefits are for both parties – the entrepreneur does not commit his funds, only the factor, and the supplier, instead of waiting 2 months for the payment, can have funds on the account right away and also improve his financial liquidity.

However, how do factors or banks approach this solution?

Reverse factoring is treated by financial institutions as a "traditional working capital loan". Contrary to classic factoring, there is no natural source of repayment in the form of contractors and risk diversification, to put it simply. In reverse factoring, the entire debt must be repaid by the entrepreneur. Therefore, factors or banks apply more restrictive criteria for granting the reverse factoring limit. Additionally, in many cases such a limit is secured with a fixed asset in the form of real estate. It also gives rise to additional costs for the entrepreneur.

The current situation have made reverse factoring more difficult to obtain in financial institutions. Some factors practically withdrew this solution from the offer or use it only in the case of a very good customer rating and security in the form of a mortgage. The coming months will show whether this solution will come back to favor factors, in particular as a solution for small and medium-sized companies.

Karol Leszczyński

Factoring Product Manager at Comarch

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