Reverse Factoring (UK)
Reverse factoring, also called supply chain finance, is set up by a large buyer so that its suppliers can be paid early. Once the buyer approves a supplier's invoice, the buyer's bank or finance provider pays the supplier straight away, less a small discount. The buyer then pays the bank in full on the normal due date. It differs from invoice finance because the buyer sets it up, the price is based on the buyer's credit, and the supplier simply chooses whether to join.
Founder & Managing Director, Muswell Rose, founder and PSC of Best Business Loans Ltd
Adam was managing director of Penny, a UK invoice finance business, from July 2020 to November 2023. His career runs through insurance, mortgages, commercial finance and fintech lending. He writes the Market Invoice library. Career record.
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How it works
- The buyer sets up the programme with a bank or finance platform.
- The buyer invites suppliers. Each supplier chooses whether to join.
- The buyer approves invoices. The supplier invoices as normal and the buyer confirms it will pay.
- The supplier is paid early. The bank pays the supplier the invoice, less a discount. The supplier usually bears this discount, as it is the price of being paid early.
- The buyer pays the bank the full amount on the original due date.
Reverse factoring vs invoice finance
| Reverse factoring | Invoice finance | |
|---|---|---|
| Who sets it up | The buyer | The supplier |
| Who pays for early payment | Usually the supplier, through the discount | The supplier, through fees and a discount charge |
| Price based on | The buyer's credit | Your customers and your business |
| Which invoices | Only invoices to that buyer | Your invoices to business customers, all or chosen ones |
Should a supplier join?
It is often worth considering, because the discount is priced on a large buyer's credit, which can make it cheaper than funding the same invoice yourself. Compare the discount with what invoice finance would cost you for that customer. Before you join, check:
- Do you choose invoice by invoice, or must every invoice to that buyer go through the programme?
- Is the buyer making its payment terms longer at the same time? If so, you may end up paying to be paid on time.
- Can the buyer or the bank change the terms or close the programme, and with how much notice?
- Does your existing invoice finance agreement allow it? If a lender already funds your invoices to that buyer, you will need its consent.
A word of caution
Reverse factoring is early payment from a bank. It does not make the buyer itself any safer, and a programme can be withdrawn. Do not let one buyer's programme become your only source of cash.
If your buyer does not offer it
Invoice finance is the option you set up yourself, and it does not need the buyer's involvement. Depending on your size and whether you want customers to know, that means invoice factoring (customers are told and the lender collects), invoice discounting (confidential, you keep chasing payment) or selective invoice finance (fund just the invoices you choose). Market Invoice can get you 3 free quotes through the finance partners we work with.
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