Benefits of Reverse Factoring On TReDS

Reverse factoring is when a financial institution steps in between a company and its suppliers, and commits to pay the company’s invoices to the suppliers at an enhanced rate in exchange for discounts, or economies of scales. 

Reverse Factoring Process

Reverse factoring involves three main components, the ordering party i.e.: the customer, the supplier and the factor. The main aim of the process is to finance the supplier’s receivables, so that the supplier can cash in the money for what he sold. This basically is an alternative financing solution.

Reverse factoring is seen as an effective cash flow optimization tool for companies outsourcing large volume of services. The benefit to both parties is that the company providing the services can get the outstanding value of their invoices paid in 10 days or less vs. the normal 30- to 45-day payment terms while the ordering party can delay the actual payment of the invoices thus increasing the cash flow of the company. 

Trade Receivable e-Discounting System is the institution set up to facilitate the financing of trade receivables of MSMEs that flow through corporates and or buyers; this includes departments of governments as well as public sector undertakings. This is done through multiple financers. This basically is a unified platform for sellers, buyers and financers.

The idea behind setting up TReDS is the hindrances MSME’s face with respect to obtaining adequate financing, and their inability to liquefy trade receivables

Benefits of Reverse factoring on TReds:

1. For the supplier:
   • The supplier has all of its invoices paid from beforehand, thus is can ensure that its cash flow is not interrupted, and can manage it well. Additionally it can reduce the way cost of receivables management.
   • This is especially beneficial for small companies that have large group financers and it creates a durable business relation where the big company helps the smaller one, while the smaller one earns a surplus in the process.
   • In the reverse factoring process, as it concerns validated invoices, as soon as the supplier receives the payment from the factor, the company is protected. The factor will have to get its money from the ordering party.


2. For the Buyer:
   • Reverse factoring permits the buyer to gather all suppliers in one financier, thereby paying one company instead of many which eases invoicing management. Additionally, TReds ensures streamlining of payment processes, transparency, and reduces the chances of inaccuracies.
   • Since all payments are and invoices are centralized with the same factor, the accounting department has to deal only with a soul company. Therefore, reverse factoring along with digitalization of transactions through TReds makes payment processes simplified and speedy.

The core principle behind reverse factoring is that all actors should mutually benefit out of the situation, thus maintaining good relations is imperative. It is thus important to choose a collaborative plan that clearly dictates when and how invoices and payments will be made, and this has been made possible with TReDs.