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SCF: Why Should Reverse Factoring Take Place on a 3rd Party Platform?

Published on 2022-01-06

Traditionally, banks provided reverse factoring facilities directly to buyers. However, third-party supply chain finance (SCF) platforms have taken significant market share in SCF around the world. Why is that the case and how can buyers benefit from multibank platforms?

Maximise financing potential

Buyers with large supply chains have diverse financing needs that cannot always be covered by traditional corporate bank solutions. Potential problems include:

  • For buyers with significant volumes, a single bank cannot extend all the funding
  • Covering suppliers in different currencies and geographies, which cannot be done by domestic/single-geography banks
  • Covering the long-tail of smaller-volume and SME suppliers, which are often left out of bank-led reverse factoring programs.

So what should companies bear in mind when choosing their reverse factoring program for supply chain?

Usually, larger buyers should develop a diverse pool of funders who can finance their supply chain in full. The reason for having many banks is simple - a single bank cannot usually provide financing for the entire supply chain because they hit internal risk and liquidity limits. If a buyer’s credit limits with a particular bank are partially drawn by other lending, credit availability for SCF would be even lower.

Reliance on a single bank for all financing is strategically questionable. Limits with a company’s relationship banks may be needed for investments rather than reverse factoring. A single bank may also change strategy and financing decisions, which could leave supply chain needs without coverage. Diversifying sources of SCF funding reduces that risk.

Last but not least, there is the question of competition - confirming multiple banks for the SCF program allows buyers to reach the most competitive terms, including the lowest possible cost of financing.

Streamline processes among banks and suppliers

Gathering invoice data and confirming invoices are key operations in SCF. This can be done manually by the company representative or automatically by setting up electronic docflow. SCF platforms help create and implement efficient processes that cover the needs of all stakeholders.

Usually, factoring financing can be obtained by concluding an agreement with the bank that will provide such financing. Traditional banks and factoring companies have different and often complex processes for factoring, which cost time and money. Additionally, there are operational risks (such as human error) and the threat of fraud (e.g. selling the same invoice to different banks).

The technical capacities of SCF platforms tend to be more agile and specialised than those of banks. Platforms are able to finance the high volume invoicing of large and complex supply chains. This is particularly important in retail. Platforms are better positioned to integrate with client systems and automate processes quickly for buyers, banks and suppliers alike. This can accelerate the time-to-value when setting up the program.

As trade undergoes rapid digitalisation, SCF platforms are also in a strong position to help adopt the most modern technologies on the market. Traditional factoring relies on scanned or even paper. E-factoring, in which original documents are signed electronically with Qualified Electronic Signatures (QES) and then shared over APIs automatically, is becoming the new standard. E-factoring reduces the administrative burden of all participants in the SCF process. SCF platforms have deep knowledge in the field and can consult on designing and implementing the most suitable processes.

Platforms enable visibility over credit limits at all financing banks, whether invoices have been financed, and which limits are used to finance which suppliers.

Buyers should consider running their SCF and reverse factoring operations in partnership with a third party platform. This strategy helps maximise the financing volumes and minimise financing costs, while maintaining streamlined processes for all parties involved.

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