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The purpose of commercial banking is to help corporations meet their funding needs in a better manner. Commercial banks help companies do this in several ways. One such way is related to the concept of reverse factoring. Reverse factoring is a solution that helps large corporations manage their supply chains better by helping optimize the management of their payables.
A large number of corporations have started partnering with their banks in order to take advantage of reverse factoring.
In this article, we will have a closer look at what reverse factoring is and why it is important from the point of view of commercial banking.
The concept of factoring is fairly well known. When a credit transaction occurs between a buyer and a seller, the buyer owes money to the seller. If the seller approaches the banks to sell their receivables in order to obtain money, this is called factoring.
However, when it comes to reverse factoring, the situation is reversed. In this case, it is the buyer who approaches their bank in order to finance their payables. The end result is the same i.e. faster funding from suppliers. However, this approach is buyer-led instead of being led by suppliers. Of course, since banks provide credit, there is an interest charge involved. In most cases since the sellers are receiving early payment, they bear the interest charge. The buyer makes the expected payment to the bank on the expected due date.
Reverse factoring is a viable on-demand alternative to traditional bank financing such as overdrafts.
Reverse factoring is a long process that involves multiple steps. The details of some of these steps have been mentioned below:
Reverse factoring is quite popular amongst many corporations because it offers several benefits. The details related to some of these benefits are as follows:
The buyer just pays the regular payables whereas the supplier can get access to early financing for a fee. Neither party has a liability on their balance sheet. This is a very important point for many companies across the world and makes reverse factoring one of the most preferred commercial banking services.
To sum it up, commercial banks need the help of technology in order to provide reverse factoring services to their corporate clients. Since this service provides many benefits, it is a much sought-after service in corporate banking.
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