Optimizing Short-Term Treasury
In our previous webinar, we discussed one of the most significant challenges faced by companies: the optimization of short-term treasury. We emphasized that a lack of treasury is a leading cause of bankruptcy, responsible for approximately one-third of business failures worldwide.
One key takeaway from the previous webinar was the conflicting goals between buyers and suppliers. Buyers aim to delay payments as long as possible, while suppliers prefer to receive payments earlier to support their operations. Larger buyers often impose longer payment terms on their suppliers, which can weaken the entire supply chain, leading to late payments and financial strain. In the previous session, we explored traditional solutions such as factoring and straight loans offered by banks. Now, we will focus on a new emerging model called collaborative reverse factoring.
Understanding Collaborative Reverse Factoring
Before we dive into the details, let’s ensure everyone is familiar with the concept of reverse factoring. Reverse factoring enables suppliers to optimize their working capital by receiving early payment for their invoices. In Factoring, suppliers would contact a third party, known as a factor, to request early payment on their sales invoices. The factor would assess the supplier’s situation, invoice portfolio, and clients. If approved, the factor would pay the supplier earlier and collect later the payment from the buyer.
In factoring, the process is initiated by the buyer. The buyer engages with a third-party factor to authorize early payment of their supplier’s invoices. All the data related to the invoices is shared by the buyer with the factor, allowing the factor to pay earlier the invoices of all the suppliers associated with that buyer.
While in “Traditional Reverse Factoring”, the supplier has no choice but to finance all their invoices, in “Collaborative Reverse Factoring” the suppliers are able to selectively opt for early payments according to their needs.
Advantages of Collaborative Reverse Factoring
Collaborative reverse factoring offers numerous advantages to both buyers and suppliers, creating a win-win situation:
For Suppliers:
- Accessible to All: The model is accessible to suppliers of all sizes and financial conditions, as it is primarily based on the buyer’s creditworthiness.
- Flexibility: Suppliers can continue sending invoices directly to their clients without any changes to their existing processes. They have the freedom to choose which invoices they want to be paid earlier, allowing them to optimize their working capital as needed.
- Affordable Source of Cash: The financing conditions of the buyer contribute to an affordable source of cash for the supplier. Indeed, the good solvency of the buyer, the upstream collaboration between the buyer and the third party and the fact that the invoices data are provided by the buyer reduces the risk for factors, resulting in lower costs for suppliers.
- Non-Recourse Early Payments: Collaborative reverse factoring provides suppliers with non-recourse early payments, freeing them from the risk of non-payment or delayed payment by the buyer.
For Buyers:
- No Balance Sheet Impact: Implementing a reverse factoring program has no balance sheet impact for the buyer, making it a favorable financing solution.
- Supply Chain Resilience: Buyers understand the interconnected nature of the supply chain. By adopting collaborative reverse factoring, they strengthen their supply chain by ensuring suppliers have access to affordable cash, fostering innovation, and enhancing the overall quality of goods and services.
- Extended Payment Terms: Buyers can negotiate longer payment terms with their suppliers while still ensuring early payment for the suppliers through the collaborative reverse factoring program. This allows buyers to optimize their own working capital without negatively impacting their supply chain.
- Enhanced Supplier Relationships: By offering early payment options through collaborative reverse factoring, buyers can strengthen their relationships with suppliers. Timely payments contribute to improved trust and reliability, fostering long-term partnerships and supplier loyalty.
- Streamlined Processes: Collaborative reverse factoring involves a centralized platform where suppliers can access by themselves information related to the treatment of their invoices by their clients. This streamlines the entire invoicing and payment process, reducing administrative burdens and improving efficiency.
Conclusion
Collaborative reverse factoring presents a compelling solution for optimizing working capital, strengthening buyer-supplier relationships, and streamlining cash flow management. By leveraging the buyer’s creditworthiness and adopting a collaborative approach, this model benefits both buyers and suppliers, fostering financial stability and supply chain resilience.
We hope you gained valuable insights into the concept of collaborative reverse factoring. If you have any further questions or would like to explore this topic in more detail, please feel free to reach out to our team at Digit89.
You can watch the full replay of this webinar here: