CRX explains the term reverse factoring as part of the CRX working capital financing solutions
Reverse factoring, also referred to as Supply Chain Finance (SCF), is a Supply-Chain-Management strategy deployed by buying organizations (i.e. buyers) to improve its working capital without negatively affecting the supplier base.
In order to improve a buyer’s working capital, a payment term extension or payment term harmonization strategy across all suppliers is generally pursued. In order to minimize possible negative affects to the supplier’s performance and stability caused by the payment term extension, buyers can offer reverse factoring programs, where the supplier can sell their approved invoices to a third-party financial institution at a discount, receiving their cash prior to the invoice maturity. At invoice maturity, the buyer pays the full invoice amount to the financial institution.
By offering suppliers the choice to finance their invoices at comparably lower financing costs the effects of the payment term harmonization can be mitigated and the supplier base in return strengthened.
The supplier issues an invoice to a buyer together with the delivery of goods and services (1). The buyer approves the invoice and uploads it to a platform (2). The supplier can review and select his approved and uploaded invoices on the platform and freely decided which invoice they want to finance. This can be done automatically or manually (3). The invoice is then offered to the participating financiers which bid on it in a transparent and competitive auction model (4). The winning financier then pays the supplier the nominal amount minus the discount (5). At maturity of the invoice, the buyer pays the full invoice amount to the bank (6).
Can generally access comparably low-interest rates due to the fact that they are based on the creditworthiness of the buyer company, not the rating of the suppliers
Improve working capital by extending or harmonizing payment terms (days payable outstanding) without negatively affecting performance or well-being of his suppliers
Benefit from attractive alternative investment opportunities in the short-term market
CRX Markets offers a full-range reverse factoring solution to all relevant parties involved. The offering includes the following services:
The buyer company (the ordering party)
The key differentiator between factoring and reverse factoring is the risk position. Reverse factoring removes any supplier risk by approving the invoice and providing an irrevocable payment obligation to financiers, whereas factoring includes a debtor’s and a seller’s risk as well as processual risks (e.g. collection, comingling).
The globalization of markets, the general trend toward specialized suppliers and the growth in outsourcing has made a diverse and differentiated supply chain essential for globally operating companies. The increasing role of suppliers in the production process and the growing dependency of buyers on their suppliers creates new challenges for supply chain management in general, and working capital optimization in particular.
At CRX we have developed two ways a reverse factoring program can be structured: Multi-Bank Approved Payables Finance (APF) and Multi-Investor APF. The Multi-Bank approach enables the buyer-approved supplier the true sale of approved payables to a group of connected banks at competitive prices. The Multi-investor solution expands the Multi-Bank offering through a transparent yet fully anonymous auction platform where banks and Investors compete for securitized payable bundles.