Why Reverse Factoring Is the Worst Innovation for Business Owners

Reverse factoring is a type of supplier finance solution that companies/buyers can use to offer early payments to their suppliers based on approved invoices. Suppliers participating in a reverse factoring program can request early payment on invoices from the buyer or other financial institution, with interest or discount and with the buyer or supplier sending payment to the financial institution on the invoice maturity date if it is the latter.

If you read our article on Purchase Order Financing, you might have noticed that some lenders may also call it Reverse Factoring. Perhaps, it is due to the lack of training for their salesforce or marketers that resulted in them using these terms interchangeably. Or it may be lenders deliberately using keyword-stuffing techniques like e-commerce players do (e.g. when you search for iPhone cables but results for iPhone cases appear instead). If you are not using us for your loan search, we recommend you to check with the lenders or their RMs their definition when talking to them so that you don't end up applying for a loan type that they may not offer.

Paying suppliers promptly and within the agreed payment terms is not only an ethical & shared responsibility but also beneficial for the wider economy.  In the EU, the EU Payment Observatory observed in 2017, that 6.5 million jobs could have been created if there had been less late payment. It is also quite possible for a profitable company to go out of business due to cashflow issues, unable to meet its obligation.

Personally, I find it absurd that a loan/solution like this exists. Many SMEs/suppliers already have to give their bigger customers longer credit terms than the smaller ones to be able to do business with these larger companies. If you need to collect your money now, the longer the credit term, the more days you will have to advance it (e.g. from 30 to 1 vs 90 to 1), the more discount (see our article on Purchase Order Financing) you have to give to receive the money that is rightfully yours. Platforms that facilitate this loan type are essentially encouraging big companies that owe you money to take even longer to pay you, making it a vicious cycle!

If you are receiving an advance from a financial institution(FI) instead, the buyer may receive a cut together with the platform. That is like willing to make you lose e.g. 3% just to make 1% for themselves.

Proponents of Reverse Factoring claim that it's a way for the buyer to support suppliers without affecting its own cash flow. There might be some truth to that if the advance is from an FI and that the buyer is not a large company. However, the way such platforms typically exist & make them different from Purchase Order Financing, a loan type which a buyer applies for cash flow to pay any of its suppliers - is that these platforms tend to go top down, having to require the big anchor buyers on board first and only your invoices to these particular buyers can be considered for funding.

Large companies usually do not just get loans and credits at a much cheaper rate than SMEs but would be easier for them to borrow too with dedicated RMs etc serving them. So why should it be the SMEs, the ones applying for a loan? We suggest offering your customers a discount for their early repayment directly.

That said, we are not here to judge or decide what's best for you. There might still be some use cases where such financing tools can still be valuable to SMEs. As Singapore's 1st loan marketplace, apart from helping connect you to multiple lenders in one single application, we aim to be a one-stop financing platform and would be working with more partners such as RBF and Venture Debt to serve you better.

This is a collaboration with FindtheLoan