With reverse factoring, the supplier receives an additional line of financing and the buyer superimposes on his payment charge. Reverse factoring is very popular in Spain, where it accounts for 40% of the market. For this form of commercial finance, a contract is concluded between the postman and a buyer (strong credit). Based on the buyer`s creditworthiness and knowledge of the identity of its suppliers, the factoring company contacts suppliers at Reverse Factoring and offers them a factoring contract for a single debtor, the buyer. Reverse factoring allows sellers to sell their receivables and/or projects related to a particular buyer to a bank as a discount as soon as they have been approved by the buyer. This allows the buyer to pay on the normal billing/design date and get an advance payment for the seller. The bank relies on the solvency of the buyer, so the cost of capital applied to the supplier is based on an arbitrage between the buyer`s lower cost of capital and the higher cost of the supplier. The starting point for reverse factoring is an approved invoice. A schematic view of the reverse factoring process is presented below. In Spanish-speaking countries, this instrument is called “confirmation.” In reverse factoring, the postman signs a contract with the buyer who provides him with a list of approved invoices that the buyer must pay in the coming weeks or months. This list allows the postman to offer each supplier an option to deconstruct its invoices (without recourse). The provider may accept or even refuse this offer for the accounts or for some of them.
In this case, at maturity, the postman transfers the money to the supplier`s bank account. If the supplier accepts the discount, it must return the signed offer to the postman who transfers the advance (expenses and interest deducted) to the supplier`s bank account. Source: Cap Gemini, Supply Transformation Blog 2012.