TradeFinance Academy
Modules/Supply Chain Finance/Payables Finance (Reverse Factoring)
Lesson 2 of 312 min read

Payables Finance (Reverse Factoring)

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Supply Chain Finance — Payables Finance (Reverse Factoring)

Buyer-led early payment program — supplier receives cash early at buyer's credit rate

Invoice SubmissionApproval & OfferEarly PaymentSettlementBUYER(Initiates program)SCF BANK(Finances invoices)SUPPLIER(Accesses early pay)① Submit Invoiceto SCF platform② Approve Invoiceon SCF platform③ Offer Early Paymentat buyer's credit rate④ Accept OfferReceives early cash⑤ Early PaymentInvoice − Discount FeeRate ~ Buyer LIBOR+spread⑥ Pay Bankon original due dateFull Invoice ValueBank receives fullpayment at maturityDay 0Supplier receives early cashDay 90 (maturity)
For Buyer
Extended payment terms (90 days). Balance sheet neutral. Stronger supplier relationships.
For Bank
Earns spread between buyer's credit rate and market rate. Low-risk (buyer-approved invoices).
For Supplier
Early cash at the buyer's lower credit rate — significantly cheaper than own borrowing cost.

Payables Finance (Reverse Factoring)

What is Payables Finance?

Payables Finance (also called Reverse Factoring or Approved Payables Finance) is a buyer-led SCF program where:
  1. The buyer approves invoices for early payment
  2. Suppliers can access early payment from a financing bank at the buyer's credit rate
  3. The buyer pays the bank on the original (extended) due date

The Key Insight: Credit Arbitrage

In a traditional supply relationship:

  • Buyer (AAA rated, large corporation) wants to pay in 90 days
  • Supplier (BB rated, SME) needs cash in 30 days
  • Supplier's cost to borrow: 8% per annum
With Payables Finance:
  • The bank finances the supplier at the buyer's credit rate (e.g., 2.5% per annum)
  • The supplier gets early payment at a much lower discount rate
  • The buyer keeps its 90-day payment terms (or extends them)
  • The bank earns the spread

The Three-Party Mechanism

Step 1: Invoice Submission
  • Supplier delivers goods and submits invoice to buyer
  • Buyer approves the invoice on the SCF platform
Step 2: Financing Offer
  • Bank sees the approved invoice on the platform
  • Bank offers the supplier early payment at a discount rate
Step 3: Early Payment
  • Supplier accepts the offer → receives (Invoice Amount - Discount Fee)
  • E.g., €1,000,000 invoice × 2.5% annual rate × 60 days early = €4,167 fee
  • Supplier receives: €995,833
Step 4: Settlement
  • On the original due date, the buyer pays the bank in full (€1,000,000)
  • The bank collects its fee from the earlier discount

Accounting Treatment Controversy

Whether Payables Finance appears as trade payables or financial debt on the buyer's balance sheet is crucial. The IASB has required enhanced disclosure under IAS 7 since 2023, following concerns that SCF programs were being used to hide debt.

Working Capital FundamentalsReceivables Finance and Invoice Discounting