Any business is in the process of experimenting, learning, and evolving to reach a higher growth trajectory. Many issues and complications arise severe worth pondering. The point of enough funds in this realm is very critical. In this article you will read about reverse factoring – a novel way for businesses to ease their cash flow concerns.
What many startups do is to make use of their savings until it dries up. Or they are taking investors on board in return by diluting the equity holdings of their venture. Prevalent are the ways of an angel or private equity investments, but with the rider of losing out control and ownership.
So some other novel ways to fill the cash flows gap will have to be found. Not so popular yet effective is the process of reverse factoring. Entrepreneurs do not make use of this as they are not pretty much aware of its benefits.
Let’s ponder about this in a detailed manner.
Entrepreneurs handling their SMEs can take installment loans which will mitigate their urgent financial woes. The terms and conditions of the loan contract are not only realistic but are as well based on the earnings of the borrower.
No worries regarding the low credit score as these online lenders also accommodate funding needs if such people bit with higher APR rates.
What Is Reverse Factoring?
Reverse factoring or supply chain finance is the process of making use of receivables as collaterals and gains funds. Not strictly termed as a loan, but these serve as strategic sources of a non-debt type of funds.
The debtors of the company only have to approve the pending payment, as mentioned in the invoice, and the rest process is easy. It is a distinct way of gaining one’s funds fastly and early before the maturity time itself.
Not many people are aware of this being an excellent short term source of own funds but in a different form.
How Is Reverse Factoring Done?
Firstly, the debtors after the receipt of the invoice shall approve it and upload the same in a factoring service terminal. Then after if the seller chooses to opt for factoring, he can contact a financial intermediary and start the same. The seller sells receipts after being categorized to this intermediary for a cost.
Cost of Reverse Factoring
The intermediary gives an amount to the supplier or seller an amount after reducing some interest payments. In return for the factoring services, interest payments based on the creditworthiness of the buyers are charged by the financiers. This amount is quite reasonable as it is calculated based on the creditworthiness of the debtors and not the suppliers.
Benefits of Reverse Factoring
Not one ounce of the energy of the supplier company is wasted for chasing debtors for early or timely payments. The relationship remains cordial and useful as the dealing and equations do not get any scratch.
The market reputation and image of the company remain intact with no scope for unsatisfied buyers. The intermediary, before contacting a debtor, will search for information on their creditworthiness.
Thus the scope for any fraud is nil-all together and terrible cases are marked as bad debts.
Only established companies undertake reverse factoring, which ensures that the intermediary also does not face unwarranted stress while approaching debtors.
The whole process is smooth as in advance itself. The debtor has affirmed and approved of the amount to be paid, nil scope for any conflict.
The guarantee of the debtors for the payments is around 100 percent. It ensures that the intermediary gains much in terms of Return on its money invested.
Categorizing Invoices Is the Key
Many suppliers, before opting for reverse factoring, do not realize which type of invoices is to be given. Confusion remains as to what all receipts are to be included in the lot for the intermediary.
Making separate categories based on amounts, product or service type, time duration, interest rates can solve this problem. This process of categorizing invoices will add on to the speed of receipt of payments, invariably.
Read Also: Keep Your Business Afloat While Covid19
People world over are unable to direct their startup venture in the right direction due to lack of funds. Significant funding lack thwarts the setting up of various processes and manufacturing function.
To relieve some of this monetary blues, they can make use of loans for bad credit quickly.
The fact that the credit score is less than average on account of several debt repayment defaults does not limit their possibility for finance. Lending institutions operate digitally via their websites to offer loan products at the most flexible repayment schedule tailor-made and personalized.
