Reverse Factoring or Factoring to supplier
For this form of Commercial Finance, a contract is set up between the Factor and a (credit strong) buyer. Based on the solvency of the buyer and knowing the identity of his suppliers, in Reverse factoring the Factoring company contacts the suppliers and offers them a Factoring contract on one single debtor, the buyer.
In Reverse Factoring the Factor signs a contract with the buyer who provides him with a list of approved invoices to be paid by the buyer in the coming weeks or months. This list permits the Factor to offer each supplier an option to discount (without recourse) their invoices. The supplier may accept this offer for the total invoices or for some of them or even refuse the offer. In this case, at maturity, the Factor will transfer the funds to the bank account of the supplier. If the supplier accepts the discount he must return the offer duly signed to the Factor who will make the advanced payment (fees and interest deducted), to the bank account of the supplier.
With Reverse Factoring the supplier gets an extra funding line and the buyer outsources his payments workload. Reverse factoring is very popular in Spain where it represents 40% of the market.