Reverse factoring is a financing solution designed to help buyers and suppliers access the working capital they need for day-to-day operations. Otherwise known as supply chain finance, reverse factoring helps support buyer-supplier relationships, reducing the risks of cash flow shortages. 

We explore the benefits of this commercial financing method, the typical process involved and how it differs from traditional factoring or trade credit.

What is reverse factoring?

Reverse factoring is a finance solution for businesses that encourages suppliers to extend credit to buyers whilst ensuring they’re not out of pocket, as finance providers advance the money owed (minus their fees for this service). Therefore, this is a mutually beneficial arrangement that helps reduce supply chain issues and cash flow challenges.

Why do businesses need reverse factoring?

Almost all businesses struggle with cash flow problems from time to time, whether it’s from supply chain issues, late client payments, seasonal demands and fluctuations or lengthy payment schedules. Having working capital trapped in supply chains can have a detrimental effect on the business’ cash flow. 

Reverse factoring is a way to minimise the impact these challenges present for businesses. Using an intermediary lender enables suppliers to offer buyers their usual period of credit, meaning both sides of the relationship have more financial breathing space.

Business owners using this financing method can manage cash flow more effectively and enjoy more available capital for various operational needs when they need it.

‍

How does reverse factoring work?

Reverse factoring works thanks to the involvement of three parties: the buyer, the supplier and the finance provider, and is designed to create a win-win situation for everyone involved.

Here is how a typical reverse factoring process works:

1. Supplying goods and extending trade credit: A supplier provides goods to a company so the buyer can carry out its business operations or sell the goods through its outlets or online stores. The supplier may give the company a timeframe in which to pay for the goods (typically 30 to 90 days) rather than requiring upfront payment. This effectively extends a line of trade credit.
2. Providing early payment via an intermediary: The buyer approaches a reverse factoring finance provider (or supply chain finance provider) to set up a facility that enables the supplier to receive early payment for the goods (from the provider), and get faster access to funds. This helps to strengthen the buyer-supplier relationship and encourages the supplier to continue extending the credit and even offer longer payment schedules. 
3. Finance providers advancing funds: If the finance provider is satisfied with the creditworthiness and risk profile of the buyer (as the buyer is ultimately responsible for payment), they will usually advance between 80% and 95% of the invoice value to the supplier, often within 24 to 48 hours of approval. The remaining amount is held back until the buyer pays the invoice in full.
4. Buyers making payment for the goods: When or before the agreed payment term ends, the buyer (in most cases) pays the full invoice amount directly to the finance provider, instead of to the supplier.
5. Final settlements: Once the finance provider receives the buyer’s payment, they’ll transfer the remaining balance to the supplier, minus a service fee or margin, which is typically 1% to 3% of the invoice value (for the privilege of offering early payment and taking on the risk).

Essentially, the buyer gets more time to pay, while the supplier can receive early payment through a reverse factoring provider, minus a small fee. This improves working capital for both parties, while the finance provider earns a small percentage on each early-paid invoice. Since suppliers can choose which invoices to sell for early payment, the arrangement offers flexibility to suit their cash flow needs.

Reverse factoring is especially useful when buyers have a stronger credit rating, as this allows suppliers to access lower financing rates. The buyer also benefits, as their good credit profile may secure longer payment terms from the lender.

What’s the difference between traditional factoring vs reverse factoring?

Both reverse factoring and traditional factoring enable suppliers to receive early payment from outstanding invoices. However, they differ in who initiates the arrangement, who takes on the credit risk and how the terms are structured. 

In reverse factoring, a buyer sets up the finance facility to support its suppliers (and encourage ongoing and better trade credit agreements). With traditional invoice finance (and specifically factoring), a company supplying goods or services approaches finance providers to get an advanced payment to reduce the impact of late customer payments or lengthy payment timelines.

Key differences between reverse factoring and traditional factoring solutions

• Financing initiators and structure: While both solutions involve suppliers getting advanced access to funds owed by a buyer, reverse factoring is initiated by the buyer, whereas traditional factoring is initiated by the supplier.
• Credit risk/approvals: In reverse factoring, approvals are based on buyer creditworthiness, rather than the supplier’s credit rating and risk profile.
• Costs of financing: The cost of a reverse factoring facility for the supplier is usually lower than in a normal factoring agreement, as the lender risk is usually lower when basing it on the buyer’s creditworthiness.
• Relationship-building/control: A big benefit of reverse factoring is how it strengthens buyer-supplier relationships and supply chain stability, whereas, in most cases, typical factoring is simply a cash flow management solution for companies supplying goods or services, with less involvement from buyers.

‍

Benefits of reverse factoring for buyers, suppliers and financing providers

As mentioned, reverse factoring offers various advantages to buyers and suppliers, plus factoring providers get their cut for facilitating the finance arrangement. Let’s break down the key benefits for each party within a reverse factoring agreement: 

Buyer benefits

• Stronger relationships with suppliers: Enabling suppliers to get paid earlier through the facility helps build trust and foster long-term relationships, which can lead to better service, pricing and terms.
• Encouraging extended payment terms: Arranging for a finance provider to advance invoice payments to suppliers encourages them to offer better and longer payment terms, which is especially helpful to larger corporate buyers using multiple suppliers.
• Efficient operations and credit management: Many reverse factoring programmes can integrate with your accounting and ERP systems, helping to simplify invoicing, credit management, payments and other key tasks.
• A more stable supply chain: Reverse factoring solutions help reduce the risk of supply chain issues, particularly those caused by cash flow issues.

Supplier benefits

• Faster access to working capital: Suppliers receive early payment from the finance provider, which means fast access to working capital, rather than waiting for the usual 30–60 day payment timelines.
• Predictable cash flow: This provides reliability around incoming payments, helping small businesses supplying goods and services improve operational efficiency and reduce risks of cash flow gaps.
• Onus on buyer credit risk: Reverse factoring agreements are based on buyer creditworthiness, often meaning lower costs than in traditional factoring. 
• Simple to use: Once the financing facility is in place, most solutions make it easy for suppliers to trigger early buyer invoice payment advances.
• Better relationships with buyers: Using the reverse factoring programme should make the transactional process easier and lead to stronger ties with the buyer. 

Finance provider benefits

• Margins: Providers claim a small percentage of an invoice’s value from each transaction covered in the agreement for advancing payments to suppliers.
• Ongoing business: Encouraging structured agreements for long-term buyer-supplier relationships means buyers leveraging their facility for ongoing invoices and, in many cases, numerous suppliers.
• Cross-selling other finance solutions: If the provider offers other business finance solutions beyond reverse factoring, there may be various cross-selling opportunities.  

Potential drawbacks

• Limitations: With reverse factoring, the capital that suppliers can access is only as much as the pending invoice values. Other solutions, like a business loan, can offer access to greater sums of money to purchase key assets, manage cash flow and invest in growth opportunities. 
• Costs for suppliers: While costs for the buyer are nominal, suppliers pay discount/service fees for early payment, reducing their margins, so not all suppliers will want to enter the arrangement, depending on the costs negotiated with prospective providers.
• Requires close monitoring on accounts: If the arrangement is poorly structured or managed, any extended payment terms offered by suppliers could be classified as debt on your balance sheet.
• Dependency: As with any financial facility, it’s important not to be over-reliant on the solutions, as it can present a risk if anyone in the chain runs into financial difficulties.
• ‍

{{business-funding-on-your-terms="/components"}}

‍

Reverse factoring companies in the UK

There are various banks, finance brokers and dedicated reverse factoring companies in the UK that can provide buyers with facilities to support their suppliers, strengthen relationships and reduce supply chain issues. 

Here are just some of the UK reverse factoring companies and providers to explore:

• Novuna: A finance broker with various supply chain solutions available within its business cash flow umbrella of services, helping you find a suitable provider with funds available in 24–72 hours. 
• Hilton‑Baird Financial Solutions: Another commercial broker that offers access to reverse factoring solutions from a suite of invoice financing solutions, matching businesses with providers that offer up to 90% of invoice values in advance, within 24 hours of invoices being raised. 
• CRX Markets: Europe’s leading independent marketplace for global working capital financing, specialising in supply chain finance, factoring and receivables financing. Buyers upload invoices to the platform, with suppliers selecting the invoices for which they’d like early payment, and then finance providers advance the payment at a small discount.
• HSBC: One of the UK’s high street banks that offers reverse factoring solutions through a dedicated supply chain finance program, Supply Chain Solutions Approved Invoices. This automated solution helps buyers give key suppliers easy access to early payment for goods, simplifying cross-border and domestic trade payables management.
• Santander: Another bank that offers reverse factoring capabilities is Santander, which operates a large-scale, global supply chain finance facility, helping improve buyer-supplier relationships, increase trade resilience and optimise payment terms.

How to choose the right provider for your business

With various providers in the UK offering a range of cash flow financing solutions, including traditional invoice finance and reverse factoring, you should consider the following things when deciding which provider is most suitable: 

• How good is your business credit score? Providers will base their financing on a buyer's creditworthiness.
• How many suppliers are you looking to onboard to a supply chain finance/reverse factoring program?
• How easy is the solution to set up, and how many suppliers can be onboarded?
• What is the typical speed of funding for suppliers’ early payment?
• What rates/fees are prospective providers offering? You need to weigh up the costs involved for you and your suppliers, alongside the ease, speed and flexibility of the solution. 

Whichever reverse factoring companies and solutions you choose, ensure they offer clear terms and pricing, and help your suppliers understand how the financing works, their rights and the rates/fees involved to maintain a smooth relationship.

Example of reverse factoring/supply chain finance in action

Let’s consider an example of reverse factoring (or supply chain financing) in action, with a fictional company called Big Cheese Ltd, which has a long-term relationship with its supplier, Cowabunga Dairy Farm:

• Big Cheese Ltd regularly buys milk from its long-term supplier, Cowabunga Dairy Farm, but wants to free up working capital to grow the business. Meanwhile, Cowabunga Dairy Farm needs faster access to money owed for supplying the milk to fund its own operational needs.
• To solve this, Big Cheese Ltd sets up a reverse factoring arrangement with a finance provider.
• Next time Big Cheese orders milk, Cowabunga Dairy Farm sends the invoice as usual, but instead of waiting 30 days for payment, the finance provider advances most of the invoice amount to Cowabunga Dairy Farm within a couple of days, enabling the farm to meet various day-to-day requirements or make key investments.
• When the invoice payment is due to Cowabunga Dairy Farm, later down the line, Big Cheese Ltd pays what it owes to the reverse factoring partner.
• This means that Cowabunga Dairy Farm gets paid faster for the milk they deliver, encouraging them to offer extended credit terms to Big Cheese Ltd, enabling both businesses to improve their cash flow.

Fast and flexible trade credit solutions for buyers and suppliers

Reverse factoring can be an effective way of fostering stronger, long-term relationships between companies and their suppliers. Using a finance provider to unlock working capital on both sides gives suppliers the freedom to choose how quickly they get paid while allowing buyers a longer period to settle invoices.

Learn more about trade credit solutions and supply chain financing in iwoca’s resource hub, offering guidance around funding options that ease cash flow challenges.

Iwoca is a leading UK business finance provider, helping SMEs manage cash flow effectively and fund their growth ambitions through flexible business loans and seamless trade credit solutions. 

With iwocaPay, we help strengthen buyer-supplier relationships through a flexible B2B buy now, pay later (BNPL) solution that enables suppliers to get paid early, while buyers can spread the cost of their trade purchases.