Supply chain financing is a tool that companies can use to enable their suppliers to optimize cash flow at low cost.
In supply chain financing — or “reverse factoring” — the supplier obtains cash upfront, from the financier/factor, for the goods or services they sell to their business customer.
The process is similar to invoice factoring, except that it’s initiated by the ordering party rather than the supplier. This is why it’s called reverse factoring.
Both parties receive short-term credit, boosting liquidity and enabling the supplier to receive immediate cash for the order. In this scenario, the supplier does not have to wait for the ordering party to pay the invoice.
Typically the ordering party is a substantially larger business than the supplier. By initiating the process, the ordering party positions the supplier to benefit from the larger organization’s credit profile.
That usually means the supplier can finance their receivables more quickly and at a lower interest rate than they could otherwise obtain.