Reverse Factoring

Maintaining your company’s liquidity is one of the biggest challenges, especially now after the economic crisis generated by the pandemic. We have good news! Factoring is the simple and reliable solution for the progress of your business.

Mutuo Capital offers your company Reverse Factoring.

What is Reverse Factoring?

The concept of Reverse Factoring is not new. Automobile manufacturers developed this financial process. Fiat used it since the 1980s to achieve better margins with its suppliers.

Reverse factoring was then extended to the mass distribution industry, as its main interest is represented by a sector where payment terms are at the center of negotiations.

Reverse Factoring is a financing tool that allows a company to continue to provide its products and services. However, instead of financing the customer’s receivables on the supplier’s initiative (as in classic factoring), this type of financing is created on the customer’s initiative, allowing its suppliers to easily finance claims.

In this context, Mutuo Capital is in charge of settling the debts of a given company’s suppliers, so that the debtor company can build a stable relationship with its suppliers, as well as strengthen its own liquidity position.

Reverse factoring is similar to classic factoring in that it involves three actors: the customer (who owes money to his supplier), the supplier (who holds receivables against its customer) and the factoring company. Similar to classic factoring, it involves the financing of the supplier’s accounts receivable through financing from a factoring company, which allows the supplier to pay cash for what it has sold to its customer.

Let’s look at an example of Reverse Factoring:

Let’s take a scenario where a company requires raw material to fulfill its orders, which is valued at USD 5,000 and the company currently has no money. Moreover, according to the terms of the contract, it does not expect to receive any money for 2 months. Let us consider the options offered by the company in such cases:

– The company contacts its suppliers and orders raw materials on credit. It promises them that the invoice will be paid as soon as it receives the cash from its customers. However, this would require at least 2 months. In this case, the supplier can decide, but in any case the company takes a risk that ultimately limits its cash flow and balance sheet.

– The second scenario is when the company contacts a factoring company to pay its suppliers. The company initiates an order with the supplier of raw materials.

The vendor reviews the order and prepares an invoice for the required payment USD 5,000. The company verifies the payment and confirms to the vendor that it will pay the required amount when due, in our case at the end of 2 months. The supplier then sells these invoice contracts to the factoring company at an agreed discount. The supplier does not have to wait 2 months. At maturity, the company (customer) makes payment to the factoring company.

What are you waiting for to ask us for financial advice?

Find out more about the exact process of International Factoring! Contact us.