Reverse factoring is your customer's arrangement, not yours. A large buyer sets up a facility with a bank or a platform, and once the buyer approves your invoice, the bank pays you early and keeps a discount. The buyer pays the bank on the original due date. The discount can be small because the bank is pricing your customer's credit rather than yours. That one fact explains the appeal – and the catch. The programme belongs to your buyer, who decides whether it exists, who is in it, and what the discount is.

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Your buyer sets it up, and your buyer's credit sets the price

Reverse factoring is a facility your customer arranges so that you can be paid before your invoice is due, at a price set by your customer's credit rating.

The industry's own definition calls it payables finance: finance 'provided through a buyer-led programme within which sellers in the buyer's supply chain are able to access finance', priced 'at a financing cost aligned with the credit risk of the buyer' (Standard Definitions for Techniques of Supply Chain Finance, Global Supply Chain Finance Forum, 2016). Buyer-led is the part to hold on to.

Four things happen, in this order:

1. Your buyer arranges the facility with a bank or a finance platform, then invites some of its suppliers onto it.
2. You deliver and invoice as normal, and your buyer approves the invoice. Nothing can happen until it does.
3. You choose, invoice by invoice, whether to take the money early. If you do, the funder pays you the approved amount less a discount for the days you have brought it forward. If you don't, you wait and are paid in full.
4. Your buyer pays the funder on the original due date. Your buyer's obligation to pay doesn't change; only who it pays changes.

That third step is the one real piece of control you have. You aren't committing a year of sales, just deciding one invoice at a time whether the money arriving sooner is worth the discount.

The discount can be modest because the funder is taking very little risk. It holds an invoice your buyer has already approved, payable by a company strong enough for a bank to lend against its whole payables book. The dispute risk is low, and the credit risk is your customer's rather than yours, so the price follows your customer's cost of borrowing instead of your own. The definitions put it as 'finance raised against a strong credit rating with lower implied cost of funding than would have been obtained on its own'.

Which also tells you what the arrangement is worth. The saving is roughly the gap between your buyer's cost of borrowing and your own. If you supply a FTSE 100 name and your own funding is an overdraft, that gap can be wide. If your buyer is a mid-sized company paying much what you pay, there isn't much of a gap to share, and the programme may cost you more than it saves.

You cannot set one up yourself, and that isn't a gap in the market. The mechanism depends on a funder pricing one buyer's credit across hundreds of invoices, so the buyer has to be large. If you want to offer your own customers longer to pay while you are paid now, that is a different product, and it comes later.

The names cause real confusion. The same arrangement is sold as approved payables finance, confirming, supplier finance, and buyer-led supply chain finance. It is 'reverse' factoring because in ordinary factoring the supplier goes looking for the finance, and here the buyer does. One distinction is worth asking about: in the softer version your buyer only confirms which invoices it considers valid, rather than giving the funder an irrevocable undertaking to pay.

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The difference from ordinary factoring is who sets it up, and whose credit is assessed

Both get you paid before your customer pays, and that is where the similarity stops. Everything that matters to you – who is assessed, what lands in your account, what you pay, and who can switch it off – runs the other way.

The row that catches people out is what you receive. In invoice factoring a provider advances part of the invoice and keeps the rest back: the British Business Bank puts the usual advance at 80% to 90% of invoice value, with the balance released once your customer pays. Reverse factoring has no advance rate and no retention, because the funder isn't guessing what the invoice is worth – your buyer has already approved it. The trade bodies' definitions say so plainly: '100% financing is the norm less a financing discount'. If someone describes a programme to you in terms of an advance rate, they are describing factoring.

The other row to read twice is the last one. With a factoring facility you are the customer and you decide when it ends. With a programme you aren't. None of this is a favour, either: your buyer wants longer to pay, and the trade credit you extend is what makes that possible.

Is it the same thing as supply chain finance? Nearly, and the sloppiness is official. The accounting standards treat 'supply chain finance', 'payables finance', and 'reverse factoring' as names for the same thing, while the trade bodies are stricter: supply chain finance is the whole category and reverse factoring is one technique inside it. If you want the category, and how a programme is built and run, read supply chain finance. This page is about this one technique.

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What the discount costs you, once you turn it into a yearly rate

You pay the discount. Not your buyer – you. That is the trade: your customer gets the longer terms, and you get the money early minus a cut.

A percentage on its own tells you nothing, which is a problem, because that is how these offers arrive. '1.5%' is cheap if it brings £20,000 forward by 50 days and expensive if it brings it forward by 10. So convert it, with one bit of arithmetic that works on any offer:

Multiply the discount by 365, then divide by the number of days earlier you get paid.

Take a dairy on 60-day terms with a cheese manufacturer, invoicing £20,000 a month. The programme pays on day 10 instead of day 60, so the money arrives 50 days early. At a discount of 1.5% that costs £300 on the invoice, and 1.5% × 365 ÷ 50 works out at just under 11% a year. Now you have a number you can hold against your overdraft rate, an invoice finance quote, or a loan.

The shape of that is the whole decision. The same discount is good value or terrible depending only on how many days it buys, and the days depend on your buyer's payment terms. A programme paying you on day 10 of 90-day terms is doing something useful. One paying you on day 25 of 30-day terms, at the same percentage, is expensive. So ask for both numbers in writing, and ask whether the discount can change.

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The programme is your buyer's to end

Here is the asymmetry at the centre of all this, and it is in the industry's own definition: 'The parties to the financing are the seller and the finance provider. The buyer … is not a party to the financing.' Your buyer builds the programme, chooses who is in it, and negotiates the rate – and then stands outside the agreement you sign. You are the one with the financing relationship. Your buyer is the one with the switch.

Four consequences follow.

You may never be invited. Programmes are extended to a buyer's largest suppliers by spend first, because that is where the working capital is. The suppliers who most need to be paid in 10 days instead of 90 are often precisely the ones who are too small to be worth onboarding. It is worth knowing that before you read a press release about a programme designed to help small suppliers.

It can be withdrawn, and the timing tends to be bad. The accounting standard-setters flagged this in 2020. A supplier, they noted, 'may have become accustomed to, or reliant on, earlier payment under the reverse factoring arrangement'. If the funder then withdrew it, the shock could hit the buyer's ability to pay its bills, 'particularly if the entity were already in financial distress' (IFRS Interpretations Committee agenda decision, 2 December 2020). Carillion is the clearest example. It had imposed 120-day payment terms on suppliers and offered an early payment facility as the sweetener. Santander withdrew that facility in December 2017, one month before Carillion collapsed.

The funder can disappear too. When Greensill Capital went into administration in March 2021, 2,170 community pharmacies in England were on a scheme it funded. They weren't left unpaid, because the government stepped in with Treasury approval for £144m of extra cash. But the National Audit Office recorded the part that should concern any supplier: 'No other finance provider was willing to take on the risks that Greensill Capital had assumed' (Investigation into supply chain finance in the NHS, October 2021). On a commercial programme there is no government behind you.

Read what happens if the invoice is disputed later. Some agreements let a funded invoice be unwound and the money reclaimed from you, on grounds that sit well outside the warranty terms you agreed with your customer. The protections in your supply contract don't automatically carry across into the financing agreement, so check whether the funder has recourse to you, and on what grounds, before you sign anything.

Check with your own lender first. If you already have an invoice finance facility, or a lender with a charge over your book debts registered at Companies House, the invoices you are about to fund through your buyer's programme may already be promised to someone else. That is a conversation to have before you join, not after.

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What your buyer's accounts now have to tell you

Reverse factoring got its reputation the hard way, through a run of corporate failures where it had quietly made balance sheets look better than they were. The rules changed as a result, and the useful side-effect is that your customer now has to disclose things you can read.

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Why the rules changed

Carillion ran an early payment facility worth up to £500m and was drawing about £350m from it when it collapsed. It presented those drawings as money owed to 'other creditors' rather than as borrowing. Moody's and Standard & Poor's told the parliamentary inquiry that this 'concealed its true level of borrowing from financial creditors', and that £472m had been classified that way (Carillion, HC 769, BEIS and Work and Pensions Committees, 16 May 2018). After Greensill, the Treasury Committee was blunter. It warned that the way these arrangements are shown in accounts 'may, at times, encourage firms to use supply chain finance to obscure the firm's indebtedness' (Lessons from Greensill Capital, 20 July 2021).

The standard-setters responded twice. In December 2020 the IFRS Interpretations Committee set out when one of these liabilities is an ordinary trade payable and when it is really borrowing. Then in May 2023 the International Accounting Standards Board issued new disclosure requirements, in response to 'investors' concerns that some companies' supplier finance arrangements are not sufficiently visible'. They apply to accounting periods beginning on or after 1 January 2024, and to UK companies using FRS 102 from 1 January 2025.

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What to look for in your customer's accounts

A buyer now has to disclose the terms of its supplier finance arrangements, how much is sitting in them, where those liabilities appear on the balance sheet, and how much has already been paid out to suppliers by the funders. It also has to give the range of payment due dates for those liabilities and for comparable trade payables that aren't in an arrangement.

That last requirement is the one to use. If the invoices inside the programme are due in 120 days and everything outside it is due in 45, the programme isn't shortening anyone's wait. It is lengthening your customer's terms and selling you the early payment back.

Two free checks before you commit. First, read those notes in your customer's filed accounts. Second, a large company – one meeting two of £54m turnover, £27m on the balance sheet, or 250 employees – has to publish its payment performance twice a year, so you can check when a business pays its invoices on GOV.UK. Those reports must also state whether supply chain finance is available to suppliers, so you can find out whether a programme exists before anyone offers you one.

One more piece of drafting is worth knowing. If you bear the cost of the finance, your buyer has to report the payment as made on the date the funder was paid, not the date you were. A buyer cannot use a programme you pay for to flatter its own payment record.

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If there's no programme, or the discount isn't worth it

Most limited companies supplying larger businesses will never be offered one of these. The gap between doing the work and being paid is the same either way, so here are four ways to close it, cheapest first.

Use the terms you already have. If no payment date was agreed, the law says payment is late 30 days after your customer gets the invoice or you deliver, whichever is later. Agreed terms for business transactions must usually be within 60 days. You can charge statutory interest of 8% above the Bank of England base rate on anything late, which at the 3.75% rate set on 18 December 2025 comes to 11.75% a year, and it moves with the rate. That lever costs nothing, and we go through using it in how to manage late payments.

Finance your own invoices. If you want funding that scales with a whole ledger rather than one customer's, financing your own receivables does that. It is assessed on your credit rather than your customer's, which is why it usually costs more than a programme would, and why it is available when no programme is.

Offer your own customers the deal your big customer offered you. iwocaPay is the same shape as reverse factoring with the control the other way round. You add a pay link to your invoice, and your customer chooses to pay now or spread it over 30 days, three months, or 12 months. You're paid upfront either way, and if they don't pay us we don't come to you for the money. You also choose who carries the cost: absorb it, and the terms are interest-free for your customer, or pass it on. A programme exists because your buyer wanted it; iwocaPay exists because you did. It funds individual invoices rather than a whole ledger, so it isn't a replacement for a programme on a seven-figure contract.

Cover the gap with a loan. If you're waiting on an invoice, a Flexi-Loan can cover the gap, and you can clear it with no early repayment fee once your customer pays. An iwoca Flexi-Loan is a business loan with flexible repayment options. When your customer runs an approval process you can usually see the money coming, so you know how many weeks you need covering. Most businesses borrowing to bridge a gap are guessing at that.

Flexi-Loan in action: TDSS UK

TDSS UK ships containers from the UK to West Africa. Between loading a container and the money arriving, founder Morris Yudu waited six weeks. He now uses a Flexi-Loan to pay to clear and store the goods upfront, loads the container, and invoices the same day, turning a six-week wait into days.

Read Morris's story

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What a Flexi-Loan costs, and who we lend to

You can borrow £1,000 to £1m over a fixed term of between 12 months and five years, so you know the repayment schedule from the outset. Because there's no fee for repaying early, you can clear it as soon as the cash arrives – many of our customers only take out our finance for a few weeks, or even days.

Interest is charged only on what you owe, and the business loan calculator shows what your own borrowing could cost. Every new Flexi-Loan needs a personal guarantee from at least one director, which means that director can be asked to repay if the company can't. We lend to UK limited companies, and we look at your revenue and what your business can afford to repay before we make an offer.

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