Reverse Factoring Market Trends

Growth Drivers  

• Increased focus on SME support: Reverse factoring or SCF can help small and medium-sized enterprise (SME) suppliers improve their cash flow and liquidity. SMEs can face impediments in accessing affordable credit that can cause disruptions to operations. Reverse factoring stabilizes the financial health of SMEs and strengthens the supply chain by ensuring that the smaller players can meet production demands. The positive correlation between reverse factoring and the strengthening of SMEs is a key factor in reverse factoring market growth. In December 2022, Endesa announced the circular reverse factoring solution with Caixabank, BBVA, and Santander. The Iberia Supplier Improvement Program by Endesa is designed to help SMEs by improving their financing conditions between 35% to 50%.

• Risk management amid supply chain disruptions: The COVID-19 pandemic exposed loopholes in global supply chains, leading to disruptions. To combat supply chain disruptions, companies are seeking to adopt reverse factoring. By ensuring early payment through a third party, suppliers are less prone to hiccups, which ensures the smooth running of the supply chain. Additionally, reverse factoring can improve cash flow, increase revenue, and reduce costs, thus, helping buyers and suppliers. In April 2021, EXIM extended its supply chain financing guarantee program and modified it to make it more accessible to suppliers. EXIM’s program helped small business exporters withstand the challenges of the COVID-19 pandemic.

• Fintech innovations and rising digitalization: Digital platforms enable streamlining of the entire reverse factoring process, from payments to invoice submissions. This reduces the workload and administrative costs, improving buyer and supplier efficiency in turn. Digital platforms also enable wider access for SMEs by simplifying the application process by eliminating extensive documentation requirements. Additionally, fintech innovations also drive market revenue such as blockchain technology that can be used to provide secure and transparent transactions. In January 2024, Global Payment, Inc. formed SecurCapital Corp. to address supply-chain finance requirements of mid-tier logistics companies by utilizing the benefits of blockchain.

Challenges  

• Regulatory burdens: Regulatory hurdles can be significant impediments to reverse factoring market growth. Stringent regulations such as Know Your Customer (KYC) and anti-money laundering requirements, along with tax regulations can add to the costs. Additionally, consumer protection laws can limit the fees and interest rates that can be charged. There can also be multiple layers of jurisdictions depending on the region and the variations can create constraints for financial institutions. Inconsistent regulations can slow down reverse factoring and increase operational costs.

• Overreliance on buyer financial health: Reverse factoring solutions are increasingly dependent on the financial stability of the buyer. In case a buyer faces financial difficulties then suppliers may still receive early payments but eventually, the financer may limit or withdraw services.  This creates a risky ecosystem for suppliers as their access to timely payments can become uncertain if buyer finances are compromised. This can be particularly challenging in volatile sectors or during global economic slowdowns. For instance, the construction company Carillion collapsed due to irregularities in reverse factoring payments to the third party as Santander UK stopped paying automatic payment of invoices to suppliers.