Reverse factoring is one way to help manage your payments and maintain a healthy cash flow. It enables payment to your suppliers quickly without draining your cash reserves. But how is it different from Buy Now, Pay Later (BNPL)?
By explaining what reverse factoring is and compares it to BNPL, this article helps to clarify these 2 aspects of global trade finance. Then, you can decide which works best for your business.
Introduction to reverse factoring
Reverse factoring is a working capital financial tool that helps businesses pay their suppliers faster without hurting their own cash flow. It’s also known as supply chain financing.
Reverse factoring works like this: a buyer arranges for a third party finance provider, usually a bank, to pay the supplier first. The buyer then repays the bank at a later date.
This helps both sides:
- suppliers get paid quickly
- buyers keep their cash longer and ensure they get the supplies they need.
How reverse factoring works – a closer look
Here’s a streamlined look at how a reverse factoring agreement typically works:
- A business (the buyer/customer) contacts an external finance provider (e.g. a bank or financial institution) to make the reverse factoring arrangement.
- The buyer requests the bank to act as a go-between with their supplier.
- If the bank agrees, they discuss and finalize the payment terms.
- The buyer approves specific invoices from their supplier for payment.
- The bank pays the supplier quickly, deducting a small fee that the supplier pays.
- The supplier benefits by getting their money sooner, while the buyer gets extra time to pay.
- The supplier delivers the goods/service.
- Later, the buyer repays the bank for these invoices.
(Note: near the end of this article is a simplified infographic showing the actions and money flow.)
Banks usually prefer using this arrangement with larger businesses because they see them as safer and more reliable.
Smaller or mid-sized companies (SMEs) might find it harder to set up a supply chain finance deal, but it’s still possible.
Reverse factoring facts & figures
Before looking at the benefits of reverse factoring, let’s take a moment to look at some recent facts and figures:
Europe leads the reverse factoring market with 50% of market share in 2023 [1]
Global reverse factoring market size = $492.72 billion in 2023 [2]
Grew to estimated $539.51 billion in 2024; CAGR of 9.5% [2]
To grow to $777.88 billion in 2028; CAGR of 9.6% [2]
Benefits of reverse factoring
Reverse factoring provides clear benefits for both the buyer (likely larger corporations) and the supplier (SMEs).
For buyers (large corporations):
- Better cash flow: Buyers can delay payments without damaging supplier relationships. They keep more cash available for other business needs.
- Stable supplier relationships: Suppliers are happier and more likely to continue providing reliable service because they receive payments promptly.
- Lower costs: Buyers might be able to negotiate better pricing because suppliers benefit from quicker payments and might offer discounts.
For suppliers (SMEs):
- Faster payments: Suppliers receive early payment.
- Improved financial stability: Faster payments mean SMEs are better able to optimize cash flow. This makes it easier for them to grow their business and reduce financial stress.
- Lower risk: By dealing with banks rather than relying on payment directly from large corporations, smaller suppliers enjoy greater payment security and cash forecasting.
- Better chance of financing and better interest rate: Here’s the best part! With reverse factoring the buyer’s credit rating is used. So, SMEs who act as suppliers might get financing that would otherwise be harder to obtain. Moreover, the interest rate might be lower, because it’s based on the buyer’s creditworthiness.
Reverse factoring vs. traditional factoring
Let’s clarify the difference between traditional factoring and reverse factoring.
They sound similar. They both allow sellers to get paid faster. They both use a financing company. But they’re different:
Traditional factoring process
With traditional factoring, suppliers take the lead: the company sells their unpaid invoices to a factoring company (e.g. a bank or financial institution).
The factoring company pays the supplier right away based on those outstanding invoices (usually between 70% and 90% of the invoice rather than the value of the whole invoice).
The factoring company also takes over the responsibility of collecting the payment from the buyer. This means the supplier gets immediate cash, but usually at a cost, as banks charge fees for this service.
Reverse factoring process
Reverse factoring, however, is initiated by the buyer. (And, that’s why it’s called ‘reverse factoring’.)
The buyer arranges with a bank or financial institution to pay their suppliers faster.
The supplier receives quick payment from bank, not by selling their unpaid invoice, but because the buyer has already approved payment.
The buyer pays the bank later according to agreed payment terms.
Summary of important differences between traditional factoring and reverse factoring
- who initiates the transaction, and
- who holds the relationship with the banks.
So, suppliers for traditional factoring.
And, buyers for reverse factoring.
Key differences between reverse factoring and BNPL for B2B
Now that we’ve described the distinction between traditional and reverse factoring, we want to focus on how reverse factoring and B2B BNPL differ. The key differences are in this chart:
| Feature | Reverse Factoring | B2B Buy Now, Pay Later (BNPL) |
| Parties involved | Buyer, seller, third party financier | Buyer, seller and/or marketplace, PSP, third party BNPL company |
| Initiator | Buyer (typically large corporations) | Seller or embedded at the point of sale |
| Primary Beneficiary | Supplier (receives early payment) | Buyer (gains extended payment terms) |
| Payment Flow | Supplier invoices buyer → Buyer approves → Financier pays supplier early → Buyer pays financier later | Buyer selects BNPL at checkout → Financier pays seller upfront → Buyer repays financier over agreed terms |
| Use Case | Enhancing supplier cash flow and strengthening supply chain relationships | Facilitating buyer purchases and improving seller conversion rates |
| Risk Assessment Based On | Buyer’s creditworthiness | Buyer’s creditworthiness |
| Typical Users | Large enterprises with extensive supplier networks | SMEs and mid-market companies seeking flexible purchasing options |
| Implementation Complexity | High (requires coordination among buyer, supplier, and financier) | Low (often integrated seamlessly at checkout) |
| Financing Terms | Early payment to supplier; buyer settles with financier at later date | Immediate payment to seller upon delivery; buyer repays financier in 30/60/90/120 days |
| Cost to Supplier | May incur fees or discounts for early payment | Seller receives full payment minus a transaction fee |
| Cost to Buyer | Potentially none; benefits from extended payment terms | Possibly none, but may include fees depending on BNPL provider and supplier’s choices |
| Integration Point | Post-invoice approval process | At the point of sale (checkout) |
| Scalability | Limited to suppliers approved by buyer and financier | Highly scalable across various buyers and sellers pending risk assessment approvals |
| Technology Requirement | Often requires specialized platforms or systems | Leverages modern fintech solutions; often plug-and-play |
| Common Industries | Manufacturing, automotive, retail, big utilities | E-commerce, wholesale, B2B marketplaces, adaptable to almost any vertical |
In both cases, the finance provider pays the supplier’s invoices at an accelerated rate compared to waiting for the buyer to pay directly. Establishing fees and the length of payment terms are calculated based on the credit rating of the buyers.
How does reverse factoring work?
Infographic on how reverse factoring works:
How does BNPL work?
Infographic on how B2B BNPL works:
What are some reverse factoring scenarios?
Reverse factoring is most useful when large buyers want to support their supply chains or optimise their working capital. Examples of typical scenarios:
Manufacturing
- Scenario: A big car manufacturer (like V) wants to ensure its smaller parts suppliers can stay solvent and reliable.
- Why? The manufacturer approves invoices early, and suppliers receive funds fast via the financier.
Retail chains
- Scenario: A supermarket chain (like Tesco) buys goods from hundreds of small food and beverage producers.
- Why? To keep shelves stocked and relationships strong, it uses reverse factoring to let suppliers get paid immediately.
Construction projects
- Scenario: A major contractor works with dozens of subcontractors and material suppliers.
- Why? The contractor pays all vendors early without hurting its own cash flow.
Agriculture & food supply
- Scenario: A giant global food brand sources ingredients from small farmers in developing countries.
- Why? To improve supplier reliability and ESG scores, the buyer helps these farmers get early payment.
Healthcare supply chains
- Scenario: A hospital network needs a steady stream of PPE and medical devices.
- Why? Reverse factoring helps smaller companies supplying medical devices, who often face cash flow issues, stay operational.
What are some B2B BNPL scenarios?
B2B BNPL is ideal for small and mid-sized buyers who need more flexibility when buying from vendors. It’s also great for sellers who want to convert more customers and boost order values. Example scenarios:
Industrial supplies
- Scenario: A plumbing business needs urgent equipment but has tight cash flow this month.
- Why? They choose BNPL terms to receive tools now and pay over 60 days.
Hospitality & cleaning services
- Scenario: A small hotel chain restocks linens and cleaning supplies from a supplier using BNPL.
- Why? The flexible payment terms smooth out seasonal revenue dips.
B2B marketplaces & wholesale e-commerce
Scenario 1:
- Scenario: A Europe-wide B2B clothing and accessories marketplace wants to provide deferred payments to as many buyers as it can.
- Why? Offering BNPL enables higher order frequency and volumes as its customers can choose payment terms at checkout and the marketplace and sellers get paid faster.
Scenario 2:
- Scenario: A small retailer wants to stock up on holiday inventory from a B2B marketplace.
- Why? BNPL lets them buy now – the buyer receives the goods ASAP – and repay after the sales season (when they have improved cash flow).
Is B2B BNPL for you?
Are you a B2B marketplace, merchant, e-commerce? Want to offer deferred payments to your customers via B2B BNPL? Let’s see if Terms.Tech is the right fit for you!
Just get in touch with our experts today!
Sources for statistics:
[1] – Precedence Research – Reverse factoring market report
[2] – Research and Markets – Reverse factoring market report
