Factoring vs. reverse factoring: key differences and advantages of channel finance
By edwin baer
Factoring and reverse factoring are both powerful tools to 𝗶𝗺𝗽𝗿𝗼𝘃𝗲 𝗰𝗮𝘀𝗵 𝗳𝗹𝗼𝘄, but they differ significantly in structure and benefits.
𝗙𝗮𝗰𝘁𝗼𝗿𝗶𝗻𝗴 means selling invoices to a third party (a « factor ») at a discount for immediate cash. While useful for liquidity, it’s often less flexible and more costly than alternatives like 𝗮𝗰𝗰𝗼𝘂𝗻𝘁𝘀 𝗿𝗲𝗰𝗲𝗶𝘃𝗮𝗯𝗹𝗲 (𝗔/𝗥) or 𝗮𝗰𝗰𝗼𝘂𝗻𝘁𝘀 𝗽𝗮𝘆𝗮𝗯𝗹𝗲 (𝗔/𝗣) 𝗳𝗶𝗻𝗮𝗻𝗰𝗶𝗻𝗴—especially when the latter are structured as supplier- or buyer-sponsored programs.
𝗥𝗲𝘃𝗲𝗿𝘀𝗲 𝗙𝗮𝗰𝘁𝗼𝗿𝗶𝗻𝗴 (aka 𝗦𝘂𝗽𝗽𝗹𝘆 𝗖𝗵𝗮𝗶𝗻 𝗙𝗶𝗻𝗮𝗻𝗰𝗶𝗻𝗴) is buyer-driven: suppliers get early payments, and buyers enjoy extended terms. The financial institution pays the supplier on behalf of the buyer before the due date – usually at lower cost and with more flexibility.
Key differences
- Ownership of Receivables: In factoring, the factor owns them; in reverse factoring, the supplier retains them.
- Collections: In factoring, the factor handles collections from the buyer; in reverse factoring, the lender handles collections on behalf of the supplier.
- Structure: Factoring = sale of assets; Reverse factoring = assignment of receivables.
Advantages of channel finance
- Early payments for suppliers, easing cash flow
- Extended payment terms for buyers
- Improved DSO/DPO = stronger liquidity
- Supports sales growth and inventory levels
- Strengthens supplier relationships
- Innovative IT platforms + diversified funding = more flexibility, less reliance on single borrowing source
Both options improve cash flow, but reverse factoring offers more flexibility, lower cost, and better liquidity. Combined with innovative IT platforms and diversified funding, your business can optimize working capital and stay competitive.
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