The reverse factoring (also known under the names of supply chain finance or reverse factoring ) is a solution of financing for companies providing goods or services. However, instead of being at the initiative of the supplier who wishes to finance his trade receivables (as in conventional factoring ), this type of financing is instead set up at the customer’s initiative , which allows its customers to providers to easily finance their claims on him with the help of a factoring company ( factor ).
In 2011, the reverse factoring market is still very weak, accounting for only 3% of the total factoring market 1 .
A financing solution
The inverted factoring technique, which is still very rare, is analogous to traditional factoring in that it involves three players: the customer (who is liable to pay his supplier), the supplier (who holds claims on its client), and the factoring company (often subsidiaries of major banking groups). As with traditional factoring, it is a question of financing the supplier’s trade receivables by a financial third party (a factoring company), which allows the supplier to immediately cash the money for what he has sold to his client (minus a cost that the financier takes) 2 .
In the case of conventional factoring, the supplier has his receivables financed by a factor. In reverse factoring, the customer will this time be interested in his supplier position, on the liabilities side, and offer some of them a financing solution for their own customer accounts (claims on the customer). It is therefore at the initiative of the customer, usually a fairly large company, and in collaboration with its own factor, that the supplier will be offered a list of invoices representing the receivables due by the customer and eligible for reverse factoring. The supplier will choose from this list the invoices that he wants to be paid immediately by the factoring company. It is therefore a real collaboration between the supplier, the customer and the company. factoring (signature of a tripartite agreement). It is the customer’s factoring company that will manage the supplier’s financing needs.
Thus, the supplier benefits from a mobilization of his client item, possibly profits from a subsidized rate of financing, the customer benefits from a discount of regulation (post suppliers) in the form of a financial product, the factoring company makes a profit by financing the supplier.
If we talk more and more about reverse factoring, it is that the solution becomes more and more important for all of its actors. After the 2007 financial crisis, banks are looking for safer investments, which leads them to invest in assets and thus in receivables. By doing so, they ensure a ROIand therefore improve their activity. With regard to contractors (customers who have signed a factor contract), the main goal for them is to help finance their suppliers to ensure that they have a sustainable business, and that they favor them for the delivery of goods / services. Finally, the obvious interest for suppliers is to have a financing solution at more advantageous rates, with a neutral effect on the BFR of their customers.
To fully understand the reverse factoring process, you need to be familiar with factoring and commercial discounting . Indeed, it can be considered that reverse factoring takes the advantages of these two solutions, to distribute the profits to the three actors. It is to better understand this to focus on 8 key points of each solution 3 [ref. insufficient] :
|commercial discount||factoring||reverse factoring|
|Eligibility||all bills||all bills||good bills to pay|
|Funding||at the initiative of the supplier.||at the initiative of the supplier.||at the initiative of the customer with the agreement of the supplier|
|Amount funded||100% of the invoice (-count)||partial amount||100% of the invoice|
|Interest rate||according to the situation of the supplier.||according to the situation of the supplier.||according to the customer’s situation.|
|Impact on the BFR||positive for the supplier.||positive for the supplier.||positive for the customer.|
|Financial gains||amount of discount (but implies immediate cash outflow)||no||share of the margin|
|Deployment to other suppliers||slow (adaptation to each supplier)||no||fast|
The concept of reverse factoring itself is not new. It is the car manufacturers who developed this process, and Fiat in particular, which from the 1980s used this kind of financing to achieve a better margin with its suppliers. The principle then spread to the supermarket sector for the interest it represents in a sector where payment deadlines are at the heart of negotiations.
In the 1990s, because of a rise in the current rate, the margins realized were too small to ensure the sustainability of the system, and it was therefore somewhat set aside. Similarly, in the early 2000s, even though the current rate fell, the discount rate also decreased, so that suppliers had alternative financing solutions, and therefore were not particularly interested in reverse factoring. Nowadays, we have reached a balance which makes it possible to guarantee to reverse factoring a profit for all its actors, and that is why it resumes its development and its expansion. This is also due to technological progress (notably dematerialization) and NICTs which allow a certain automation of the process, and an accelerated management of the invoice processing.
An improved trade relations
In the conventional billing, or classic factoring, there are always several risks that weigh on the invoices 4 :
- fraudulent bill (illegal, miscalculation, or typing error)
- a bad estimate from one of the parties about the purpose of the invoice (a poorly performed service for example)
- a poor estimate of payment deadlines
By using reverse factoring, these risks are greatly reduced.
In the commercial realm more and more people realize that the success of one will lead to the success of the other. As a result, offering preferential rates to your partner will in any case have a beneficial effect in the longer term on your own business 5 .
For the supplier
- By being billed earlier, the supplier can more easily manage their cash flow requirements, and at the same time reduce the cost of managing their account. Moreover, since it is his client who agrees to pay, the rate of financing of the bill is more advantageous than if he had gone through the traditional factoring technique.
The reverse factoring (or reverse factoring ) is useful for SMEs that have the customers of large groups, because it is in a more sustainable relationship with a client who benefit from its size to its small supplier 6 .
- In a factoring system, if ever there is a problem with the payment of the invoice (whether due to a bad service, a financial problem of the customer or other) the financier can turn against the supplier to recover the invoice. money that has been advanced and can not recover from the customer. In the case of reverse factoring, as it concerns “good-to-pay” invoices, once the financier pays the supplier, he can only turn against the customer (of great importance) to obtain the payment. The supplier is therefore protected as soon as he receives the payment, contrary to the case of simple factoring 7 .
- Finally, in a business discount model , the supplier is “condemned” to be paid cash on a systematic basis (or according to agreed deadlines), irrespective of its cash position. The advantage that some inverted factoring solutions present then is the choice of factoring an invoice or not, according to the needs of the supplier.
For the client (the client)
- Reverse factoring makes it possible to no longer pay each supplier independently, but to collect all the invoices from a financial third party, the factoring company, which then facilitates the management of the payment of invoices.
- The relationship with the suppliers is improved because they benefit from better rates thanks to the customer, which is generally an important company, and reduce the payment times; the customer, for his part, does not pay his invoices until the date initially agreed.
- To use an inverse factoring solution is also to perpetuate its suppliers. By providing them with preferential financing, this may allow some suppliers to stay in business and cope more easily with cash flow problems. Providing this enhanced rate of financing is also a significant advantage in a negotiation, and can thus ensure a better result and / or a more sustainable relationship.
- With reverse factoring, instead of paying many different providers, payments are partly (or entirely) centralized with the financier. It is therefore a much simpler management for the customer, and which can even more easily be simplified by the use of a specialized reverse factoring platform.
- Finally, depending on the terms negotiated with the factoring company, the customer will benefit from a retrocession on the profit that the factoring company has made. The customer thus realizes additional income without affecting his BFR .
For the factoring company (the financier)
- By intervening in the settlement of the invoice, the factoring company makes a profit by making available its money and taking charge of the deadlines for payment of invoices. However, unlike simple factoring, this time the factoring company is placed at the heart of a more sustainable business relationship.
- Another benefit for the financier (or factor ) is working with large customers directly, rather than looking for each supplier. Indeed, in a factoring system just as in a reverse factoring system the factoring company can have all the suppliers of the same customer. However, in the first case the risk of each invoice corresponds to the risk of each supplier, while in the second case the risk relates to a larger customer (therefore the risk is reduced).
To show the advantage of reverse factoring over conventional factoring, it suffices to observe what would be the difference in the same given situation. If the factoring company discounts for 15 suppliers of the same customer (classic factoring situation), and one of the invoices turns out to be fraudulent, it will have to demand reimbursement from the supplier in default: it is therefore penalizing to both for the factor and the supplier. In the case of reverse factoring, if an invoice is not paid on the originally scheduled date, the customer having agreed to pay it, the factor will have no trouble getting his money (for the supplier the status of the invoice will only switch from “accounts payable” to “financial debts”
We mainly see the inverse factoring coupled with the dematerialization of invoices to speed up the process. Indeed, since the goal is for the supplier to obtain money as quickly as possible, many companies opt for a paperless system to automate the processing of this task, and thus shorten the deadlines again. can estimate that by opting for a solution of dematerialization combined with a solution of reverse factoring, the supplier can on average begin to finance his invoices 10 days earlier).
Successful Passage to Reverse Factoring
The principle of reverse factoring is to use a process that benefits all parties. Therefore, it is first of all necessary to have good relations with each of the actors, in order to guarantee the real commitment in the factoring process. The main problem that may arise, however, concerns mainly the supplier: he will not necessarily need to invoice his invoices, according to his cash requirements. Thus, it is better to opt for a collaborative inverted factoring system, which allows the supplier to choose which invoices he wishes to invoice rather than automatically having all his invoices settled immediately.
- ↑ Reverse factoring , on lenouveleconomiste.fr [ archive ]
- ↑ Reverse Factoring: why they did it , on bfinance.fr June 30, 2011 [ archive ]
- ↑ Reverse factoring client seminar, at the Louvre hotel
- ↑ Digitize your papers and become more efficient on chefdentreprise.com [ archive ]
- ↑ Frédéric Vendeuvre, managing partner and co-founder of the firm Halifax Consulting [ archive ]
- ↑ A solution for SMEs , in AGEFI March 2011 [ archive ]
- ↑ DAF Info [ archive ]
- ↑ bfinance.fr , Reverse factoring, why they did it! [ archive ]