Suppliers and purchasers can benefit from reverse factoring in certain situations. But, as entrepreneur Anthony Zingarelli Par Funding, leader of United LLC, explains, some businesses aren’t familiar with how this financing arrangement works.
Reverse factoring helps bridge the gap between suppliers and buyers in the supply chain, providing much-needed financing. Below is a more detailed explanation of reverse factoring and how it can benefit your business.
Reverse Factoring Definition
Reverse factoring involves a third-party lender as an intermediary between suppliers and buyers. This is similar to invoice factoring in other industries.
The lender, also known as the factor in the arrangement, will purchase all or some of the company’s outstanding invoices and then take over the responsibility of collecting the amount owed on the invoices.
Factor will offer a certain amount to the company based on outstanding invoices. Typically, this amount will range from 70% to 95% of the total outstanding amount of invoices.
After collecting outstanding invoices, the company pays the factor and fees to advance the amount.
Reverse Factoring Benefits
There are many potential benefits to reverse factoring to both suppliers and buyers in the supply chain. Here’s a more detailed explanation.
Buyers
Reverse factoring helps buyers improve their cash flow. By bringing in money faster than conventional collection methods, they are able to significantly reduce their DPO or days outstanding.
This type of financing also helps prevent disruptions in the supply chain. It’s no secret that the global supply chain is currently experiencing some significant disruptions, which have had a massive impact on consumers and buyers. Reverse factoring can help avoid these types of hurdles by providing early access to payments.
Buyers can also offer reverse factoring to their suppliers, putting them in a better negotiating position against competitors.
Suppliers
One of the most important benefits of reverse factoring for suppliers is access to funding that is lower cost than other options. The funding suppliers can receive is based on the buyer’s credit rating, not the supplier’s.
As such, suppliers are typically charged lower interest rates than other available funding. It also helps suppliers to improve their working capital, as they will be receiving payment on invoices sooner.
Anthony Zangarelli of United LLC says suppliers can use that extra working capital and improved cash flow to invest in R&D (research and development) and grow businesses in other ways. R&D is critical to suppliers and the overall supply chain.
Finally, reverse factoring provides stability and consistency in cash flow for suppliers, allowing them to make more accurate forecasts. This cash flow assurance will enable suppliers to make better business decisions based on when they will have additional cash to invest in the company and when they may want to stop doing so.
About Anthony Zingarelli
Anthony Zingarelli is the founder of United LLC, an operations management solutions firm located in Dallas, Texas. Zingarelli relies on his expertise in operations management to help companies and startups experience tremendous growth by securing financing, building business plans (including exit strategies), and recruiting key personnel and resources.
