Reverse Factoring

Reverse factoring is a buyer-led financing programme in which a bank or other funder buys a supplier's invoices once the buyer has approved them for payment, paying the supplier early and collecting the full amount from the buyer on the due date. Because the buyer has confirmed it will pay, the funder prices the deal on the buyer's credit, which is usually much stronger than the supplier's. Large manufacturers and retailers use it to support their supply chains and lengthen payment terms; their suppliers use it to get cheaper and faster cash.

The technique is also called payables finance, the term used in the 2016 Standard Definitions for Techniques of Supply Chain Finance, as well as approved payables finance or "confirming". It is the reverse of ordinary factoring because the buyer, not the supplier, sets up the programme. Accounting standard setters introduced disclosure rules for these arrangements in 2022 (FASB) and 2023 (IASB).

A big supermarket buys from hundreds of small farms and pays them after 90 days. Waiting that long is hard for the farms, and their own banks would charge them a lot to borrow, because they are small. The supermarket, though, is a large company that banks trust.

So the supermarket asks its bank to help. When the supermarket approves a farm's bill, the bank offers to pay the farm now, minus a small fee. Because the bank is really relying on the supermarket to pay later, the fee is low, close to what the supermarket itself would pay to borrow. The farms get quick cash at a good price, the supermarket keeps its 90-day terms, and the bank earns a safe return.

1. The buyer agrees a programme with one or more funders and sets a limit.
2. Suppliers join by signing the programme terms, usually on a supply chain finance platform.
3. The buyer approves invoices and uploads them, confirming the amount and due date it will pay.
4. Each supplier chooses which invoices to sell; the funder buys them under a receivables purchase agreement, normally without recourse to the supplier.
5. On the due date, the buyer pays the full invoice value to the funder.

The supplier's discount on one invoice is usually calculated as:

Here $D$ is the discount, $F$ the invoice value, $b$ a benchmark rate such as SOFR, $m$ the funder's margin reflecting the buyer's credit rating, and $t$ the days to maturity. With a 100,000 invoice, a benchmark of 4.3 percent, a 1.2 percent margin and 75 days left, the discount is about 1,146, so the supplier receives about 98,854. If the same supplier used non-recourse factoring on its own credit, the margin might be several times higher.

• Suppliers. Cheaper funding than their own credit allows, faster cash, lower days sales outstanding and, where the sale is without recourse, removal of the receivable from their books.
• Buyers. Longer payment terms and a higher days payable outstanding, which free up working capital, and a more stable supply base.
• Funders. Short-dated exposure to strong corporates and a way to win the buyer's wider banking business.

The main accounting question for the buyer is whether amounts owed under a programme are still trade payables or have become borrowing from the bank. If the programme changes the terms substantially, for example by extending payment far beyond normal industry terms or giving the bank special rights, analysts and auditors may argue that the liability is really debt. In the United States, FASB's ASU 2022-04 requires buyers to disclose the key terms of supplier finance programmes, the amount outstanding and, from fiscal years beginning after 15 December 2023, a rollforward of balances. The IASB amended IAS 7 and IFRS 7 in May 2023, with effect from 1 January 2024, to require similar information about terms, amounts, payment ranges and effects on cash flows and liquidity risk. Neither change alters how the liabilities are measured.

Reverse factoring can hide leverage. A buyer that stretches terms and relies on the programme may report strong operating cash flow while its true borrowing grows; if funders withdraw, suppliers lose early payment at once and may demand faster settlement, creating a sudden cash squeeze. The best-known examples are the 2018 collapse of Carillion in the UK, whose early payment facility had masked how much it effectively owed, and the 2021 collapse of Greensill Capital, which cut off funding to companies that depended on it. Rating agencies increasingly add programme balances to adjusted debt.

For suppliers, the main concern is that programmes can be used to impose longer payment terms, with the supplier paying the financing cost. For funders, programmes concentrate exposure on a single buyer's credit risk, which they manage through limits, trade credit insurance and distribution to other banks. Unlike dynamic discounting, where the buyer uses its own cash, reverse factoring depends entirely on third-party funding remaining available.

• Financial Accounting Standards Board (FASB)
• IFRS Foundation
• International Chamber of Commerce