Banking on the Financial Supply Chain

FX&MM MAY ISSUE 2010 To subscribe online visit: www.fx-mm.com REVERSE FACTORING – BENEFITS FOR ALL A growing number of transaction banks are implementing supplier finance programmes for their large credit-worthy customers who wish to support their supply chain partners. Reverse factoring is the most popular model, enabling banks to provide suppliers with finance at a lower cost than they would normally achieve through direct credit facilities. The credit arbitrage is achieved by the bank securing an undertaking from the buyer (who has a higher credit rating than the suppliers) to settle all invoices at maturity. By financing the buyer’s approved payables, the bank mitigates transaction and fraud risk. In addition to the lower borrowing costs and the off balance sheet treatment of these receivables purchase programmes, a further attraction for suppliers invoicing in foreign currencies is that by taking early payment they protect themselves against foreign exchange fluctuations. In return, the buyer ensures a more stable and robust supply chain, can choose to negotiate lower costs of goods and extend Days Payable Outstanding, improving working capital. Given the compelling benefits of reverse factoring, the market challenge is to drive these new programmes into mainstream acceptance.