Some people have come to question the value of Factoring, or Invoice Discounting. It can be seen as a warning signal that a supplier is getting into difficulty – and it’s quite costly at that. Occasionally it has caused customers to begin looking elsewhere, especially when a bank starts chasing them for payment.
But it doesn’t have to be that way. Reverse Factoring funds the upstream Supply Chain. It is less costly, more discrete and just as effective in injecting cash into the business without going into debt.
Traditional Factoring (Channel Financing): Your Receivables are paid by a Principal earlier than your Customers would normally pay them. The Principal is paid later by multiple debtors – your Customers.
Reverse Factoring (Supply Chain Financing): Your Payables are paid by a Principal earlier than your Suppliers would normally be paid. You pay the Principal, which has one debtor – easier to manage and costs less.
Reverse Factoring is an effective tool for cash flow optimization. As the Manufacturer you can choose which of your Suppliers’ invoices are paid early by the Principal instead of by you in the normal 30-45 day terms. You pay the Principle say 75-100 days later.
Advantages for the Supplier
- easier to manage cash flow and reduce the costs of receivables management
- no credit evaluation required
- releases Working Capital that can be invested elsewhere in the busines
Advantages for the Manufacturer
- helps negotiation of better terms and conditions with Suppliers – price, delivery, quality etc.
- avoids impact on customer relations since a Bank is not following up payment
- avoids Customer suspicions about the financial viability of their Supplier, the Manufacturer
- improves relations with Suppliers as they’re repaid sooner and payment delays are eliminated
- improves Suppliers’ cash flow and reduces the risk of Supplier defaults
- controls which Supplier invoices are paid early and when, in line with their own cash-flow needs
- releases Working Capital that can be invested elsewhere in the business
Maestro’s heritage goes back to the “Father of flow” who was nominated for a Nobel Prize in Economics for Working Capital Management. See Wikipedia.
I have taught and implemented these principles of flow in over 20 industries over the past 20 years in almost as many countries. For more information check Case Studies.
For more on what all this might do for you
Michael Morris. UK Operations Director. See LinkedIn