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Consider the option when a financially stable buyer (credit rating AA), which buys with a deferred payment in 40 days from its less financially stable supplier (BBB credit rating). Since the supplier needs liquidity, it sells part of these formed receivables for this operation to a financial institution, say for 15%.

This high cost is due to two factors: first, the bank protects itself from the risk of non-payment by the buyer, the second, as the supplier is financially unstable, it will not be able to return the money if the buyer does not pay for the delivery on time.

After that, the buyer, together with the bank, makes the following offer to the supplier:

At any time when you need liquidity (meaning financial means) you can sell your receivables to another bank that will pay 6%, not the previous 15%. On the other hand, the deferred payment for the buyer increases from 40 to 80 days. “The bank sets an interest rate of 6% because the buyer has assumed the obligation to pay on time (we remember that the buyer is a financially stable organization with a credit rating of AA).

Such conditions are more favorable for the supplier, as the cost of a joint factoring operation is reduced compared to its individual conditions (when he himself buys a factoring service from a bank). The buyer wins, because he pays 40 days later to the supplier. The reverse factoring company takes care of the perfect option now.

Thus, the reverse factoring (described transaction) seems to be a win-win-win decision. Perhaps, it is for this reason that some European governments, for example, the British government, last year saw in the reverse factoring a way to solve the liquidity problem for private enterprises in small and medium-sized businesses. Thus, they are now encouraging firms and financial institutions to accept back financing programs, while others, such as the Dutch, may follow suit this year.

Problem moment

The scheme works fine until the buyer pays the bills on time, i.e. The calculation is based on the fact that the buyer remains financially stable. Nevertheless, what will happen if the buyer can not pay his bills in time, then the banks immediately exit the reverse factoring scheme, the closing of which in this case will push the financially unstable suppliers to bankruptcy, and this may affect the entire industry and, possibly, economy. In fact, if reverse factoring becomes widespread, it could well become the backbone of the next financial crisis.

You may be right in thinking that the chance that a financially stable player will not be able to pay the bill in time is minimal, but that does not mean absolutely that it is impossible. Of course, both these corporations went bankrupt because of financial scandals, but the fact is that financial scandals are taking place.

How to prevent unlimited growth of reverse factoring

Although the use of reverse factoring can be very useful under certain circumstances, its growing use as an instrument can lead to serious consequences. One of the ways to prevent uncontrolled growth of these programs can be the “factoring companies” themselves, i.e. financial institutions that provide liquidity (financial means), for example, to impose a “risk premium” on the buyer, in order to compensate for these possible risks.

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