OCKOURI BARNES

ENTREPENEURSHIP UNIT 1
SUPPLIER FINANCING HANDOUT
GRADE 12

Method Of Supplier Financing

The reverse factoring method, rare, is similar to the factoring method as it involves three actors:
the ordering party (customer), the supplier and the factor (financer). Just as basic factoring, the
aim of the process is to finance the supplier's receivables by a financier (the factor) so the
supplier can cash in the money for what they sold immediately (minus an interest the factor
deducts to finance the advance of money).
Contrary to the basic factoring, the initiative is not from the supplier, that would have presented
invoices to the factor to be paid earlier. This time, it is the ordering party (customer) that starts
the process usually a large company choosing invoices that they will allow to be paid earlier by
the factor. Then, the supplier will choose which of these invoices he will need to be paid by the
factor. It is therefore a collaborative project between the ordering party, the supplier and the
factor.
For starters it is the ordering party that starts the process, it is their liability that is engaged and
therefore the interest applied for the deduction is less than the one the supplier would have been
given had they had done it on their own. The ordering party will then benefit of a part of the
benefit realized by the factor, because they are the one to allow this. The financier will play their
part make their profit and create a durable relation with both the supplier and the ordering party.
Reverse factoring is an effective cash flow optimization tool for companies outsourcing a large
volume of services (e.g. clinical research activities by Pharmaceutical companies). The benefit to
both parties is that the company providing the services can get the outstanding value of their
invoices paid in 10 days or less vs. the normal 30- to 45-day payment terms while the ordering
party can delay the actual payment of the invoices (which are paid to the bank) by 120–180 days
thus increasing cash flow. After the initial period of cash flow optimization, it is unclear if this
will remain of value to the ordering party because you will then be paying monthly invoices of
approximately equal amounts assuming your outsourced services are stable/average across the
year/future periods.

Historic Aspect
The concept itself of the reverse factoring is not that original. It is the automobile constructors
who started to use it. Particularly, as of the 1980s’, this kind of financing process was used for by
suppliers in order to acquire a better margin. The principle then spread to the retail industry
because of the interest it represents for a sector where payment delays are at the heart of every
negotiation.
In the 1990s’and the early 2000s’, the reverse factoring was not used a lot because the economic
contexts did not allow it to be an efficient way of financing. Today however, because of the
NTICs and various legal advances, it has become a very successful tool.

Advantages
For the supplier
The supplier has its invoices paid earlier; therefore it can more easily manage its cashflow, and
reduce by the way the costs of receivables management. Moreover, as it is the ordering party that
puts its liability at stake, it benefits from a better interest rate on the trade discount than the one
that would have been obtained by going directly to a factoring company. The reverse factoring is
very useful for small companies that have large groups for clients, because it creates a more
durable business relation as the big company helps the smaller one, and doing so gets some extra
money. This opinion does not account for the poor relations caused by unilateral changes to
credit terms. Smaller companies are generally not given a choice to accept the additional cost of
finance imposed by this process. In a factoring process, if there is any problem concerning the
payment of the invoice, it is the supplier that is liable, and has to give back the money he
received. In the reverse factoring process, as it concerns validated invoices, as soon as the
supplier receives the payment from the factor, the company is protected. The factor will have to
get its money from the ordering party. Finally, in a trade discount system, the supplier is forced
to be paid cash, regardless of its cash flow. Some reverse factoring platforms identified this
problem, and therefore propose to the suppliers a more collaborative financing method: they
choose themselves the invoices they want to receive cash, the others will be paid at due date.
For the ordering party (the buyer)
The reverse factoring permits all the suppliers to be gathered in one financier, and that way to
pay one company instead of many, which eases the invoicing management. The relation with the
suppliers benefiting of the reverse factoring is improved because they benefit from better
financing, and their payment delays are reduced; for its part, the ordering party will gain some
extra money reversed by the factor and pay her invoices to the due date. Making suppliers
benefit from such advantages can be a powerful leverage in negotiation, and also ensure a more
durable relationship with the suppliers. Moreover, it ensures that the suppliers will be able to find
advantaging financing in case of cash flow problem: using reverse factoring assures that the
suppliers will still be in business, and are reliable. With the reverse factoring, instead of paying
numerous suppliers, most of the invoices are centralized with the same factor; it is always better
for the accounts department to deal with one company to pay than several. This can also be
simplified and speeded by using a reverse factoring platform combined with digitalization of
business transactions (i.e. EDI).
For the factor (the financier)
By taking part in the reverse factoring process, the factor realizes a benefit by making available
cash to the supplier and supporting in its place the delays of payment. However, in opposition to
the factoring, in this situation the factor is in a more durable business relation as everyone
benefits from it. Other advantage for the financier, is that he works directly with big ordering
parties; it means that instead of going after each and every supplier of that company, he can
reach faster and more easily all of the suppliers and do business with them. Therefore, the risk is
less important: it passes from a lot of fragmented risks to one unique and less important.

Structures
Supply Chain Finance practices have been in place for over a decade. Four distinctive Supply
Chain Finance structures have formalized.

 Buyer managed platforms: In this structure the buyer owns and runs the Supply Chain
Finance platform. Some large retailers such as Carrefour or Metro Group are using this
structure and managing the finance program.

 Bank proprietary platforms: This Supply Chain Finance structure is managed by large

commercial banks providing the technology platform, as well as services and funding. This
structure is used by several large buying organizations such as Carlsberg, Boeing, Marks &
Spencer and Procter & Gamble.

 Multi-bank platforms: This structure has exhibited the strongest growth rate and is
represented by an independent third party supply chain finance provider which offers multi-
bank platforms. This structure separates the entities, which manage the platform into a
specialized service provider, from the funding partner, which provides liquidity and takes the
credit risk. Based on the fact that funding in Supply Chain Finance is uncommitted, no bank
can fund in every jurisdiction or currency due to the general limitations in terms of credit risk
appetite and funder concentration risk.

 Market share: In terms of market share, programs are serviced and funded by a handful
of players including large commercial banks. Together they manage over 40% of the market
share. The rest of the Supply Chain Finance is serviced and funded by a variety of local
banks and smaller, independent service providers.

Factoring vs Reverse Factoring

One of the biggest differences between factoring and reverse factoring is that factoring is
initiated by the supplier and not by the ordering party. Another important difference between
factoring and reverse factoring is that factoring qualifies as debtor finance and reverse
factoring does not.
Reverse Factoring Choice
The core principle of the reverse factoring is to have a way that benefits to all the actors. That
way, it is necessary to have good relations with the other actors. The principal risk in reverse
factoring is that the supplier gets trapped in a system where he cannot decide which invoices he
need paid immediately or not, and therefore he becomes the victim of that system. Therefore, it
is necessary to choose a collaborative platform that would permit the supplier to select which
invoices they will be paid early, and when they will be paid.