What's the difference between Reverse Factoring, Supplier-Funded Financing & Buyer-led Financing?
Reviewed by: Bruce Sayer
Here’s a breakdown of the differences between Reverse Factoring, Supplier-Funded Financing, and Buyer-Led Financing:
1. Reverse Factoring
- Definition: Reverse factoring, is a buyer-initiated financing solution where the buyer’s payment obligation is used as collateral to provide early payment to the supplier through a third-party financial institution (the factor).
- Key Features:
- Buyer-Initiated: The buyer sets up the reverse factoring program with a financial institution to offer early payments to its suppliers.
- Financial Institution Involved: The supplier gets paid early by the financial institution, while the buyer pays the financial institution on the original due date.
- Low-Risk Financing for Supplier: Since the financing is based on the buyer’s creditworthiness (typically a large, financially stable buyer), the supplier can access early payment at a lower financing cost.
- Example: A large retailer like Walmart sets up a reverse factoring program with a bank. When a supplier invoices Walmart, the bank pays the supplier early, and Walmart pays the bank later.
2. Supplier-Funded Financing
- Definition: In supplier-funded financing, the supplier offers financing or extended payment terms to the buyer, often through credit arrangements or by working with a financial intermediary.
- Key Features:
- Supplier-Led: The supplier takes the initiative to extend credit or offer financing to the buyer, giving the buyer more time to pay.
- Supplier Bears the Risk: The supplier may either extend terms directly or work with a financial institution to provide financing, bearing the risk until the buyer pays.
- Cash Flow Relief for Buyers: This is beneficial for buyers who need more flexible payment terms but want to maintain access to goods or services.
- Example: A supplier of raw materials extends 90-day payment terms to a manufacturer, allowing the manufacturer to manage its cash flow more effectively.
3. Buyer-Led Financing
- Definition: Buyer-led financing is another term for reverse factoring or supply chain finance, where the buyer initiates the program to help their suppliers access early payments.
- Key Features:
- Buyer-Initiated: Like reverse factoring, the buyer leads the process by engaging a financial institution to facilitate early payments to suppliers.
- Improved Supplier Cash Flow: Suppliers can access cash earlier, with the financing costs based on the buyer’s creditworthiness, not the supplier’s.
- Lower Cost for Suppliers: Since the financing is based on the buyer’s stronger credit profile, suppliers often receive better financing rates than they would through traditional factoring.
- Example: A large corporation sets up a buyer-led financing program to allow small suppliers to receive payments earlier via a third-party financier, while the corporation sticks to its regular payment terms.
Key Differences
| Factor | Reverse Factoring | Supplier-Funded Financing | Buyer-Led Financing |
|---|---|---|---|
| Initiated By | Buyer | Supplier | Buyer |
| Who Bears the Risk? | Financial institution (based on buyer’s credit) | Supplier or financial intermediary | Financial institution (based on buyer’s credit) |
| Main Objective | Improve supplier cash flow and reduce costs | Help the buyer with extended payment terms | Improve supplier cash flow and reduce costs |
| Who Gets Paid Early? | Supplier (via financial institution) | Supplier offers extended terms to buyer | Supplier (via financial institution) |
| Cost Based On | Buyer’s creditworthiness | Supplier’s decision and financing terms | Buyer’s creditworthiness |
Summary
- Reverse Factoring (or Buyer-Led Financing) is buyer-initiated, allowing suppliers to receive early payment based on the buyer’s credit.
- Supplier-Funded Financing is led by the supplier, offering extended payment terms to the buyer, often at the supplier’s own cost or through external financing.
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Tom Siska
Tom‘s impressive career includes transformative successes, solidifying his stature in the financial sector. Notably, he drove impactful Sales & Marketing strategies at Sterling Commercial Credit LLC, culminating in a game-changing acquisition.
At Grasshopper Bank NA, he played a pivotal role in establishing a thriving commercial and asset-based lending group and his skill in integrating and overseeing acquisitions at North Mill Capital underlined his strategic acumen.
His talent for nurturing winning teams and delivering transformative outcomes has yielded an impressive $100MM in stakeholder value across diverse startup and turnaround ventures.