Main methods of payment to suppliers and the advantages of Reverse Factoring

The cash flow and payment management departments must consider the way in which payments to suppliers are made, because each type of payment has its own advantages or is better suited to the company’s strategy, the relationship with the supplier, or the respective needs of both. Far from being a trivial matter, choosing the payment method is a matter of strategy.

Payment by bank transfer, check, direct debit, or credit card payment are some of the traditional methods. In this article, we focus on the payment to suppliers through reverse factoring as an invoice financing tool. Find out here about its advantages.

Payments to suppliers on due date

The most commonly used methods of payment to suppliers have changed over time, always depending on the latest technology available. If we go back only a century, the most frequent means of payment were checks or cash because technology at the time could secure capital through processes related to paper-based technology.

Nowadays, with an entire digital business ecosystem highly secure and with regulations shielding it, the most common method is bank transfer. However, mobile payment services are rapidly becoming popular in countries such as China. The most commonly used methods of payment to suppliers include:

Bank transfers

Bank transfers are undoubtedly the method of choice for payments to suppliers. It became particularly popular since digitalization made it possible to make use of banking websites for sending transfers and being able to use mobile applications such as the BBVA app. The ease with which these types of money transfers are carried out has made them highly popular.

Checks as a payment method

Checks have gone in the opposite direction. Although they are still widely used, especially in their digital/digitizable version (online checks), checks have been losing popularity in favor of other means of payment to suppliers. Nevertheless, they are still useful for some businesses, like the ones that issue these payments a few days before they have liquidity.

Credit card

Particularly used in e-commerce, especially B2C, it is still valid for small purchases or SMEs. With credit cards, the amounts paid to suppliers are usually much lower than with other methods, and the fact that they are nominative makes them a good tool for managers or senior officials to have a flexible credit facility.

Direct debit

A direct debit is an order from an accountholder for automatic transfers to designated beneficiaries. It is very frequently used in the purchase of similar volumes of raw materials or in services that do not change in cost over the months. It is a basic way of “automating” some payments, although often reconciliation is required at the end of the period.

Payment advances: Reverse Factoring

The use of reverse factoring and other financial services as a form of payment to suppliers is spreading thanks to its many advantages.

What is reverse factoring as a form of payment to suppliers?

Reverse factoring is a type of financial service offered by financial institutions in the business segment to facilitate the management of payments to suppliers. With this service, the financial institution offers its client’s suppliers the option to bring forward the collection of payables through a credit assignment contract. 

Benefits and advantages of reverse factoring

Reverse factoring offers advantages both for the company that issues it (a client of the financial institution) and for the supplier company, which can make use of it to bring forward the collection of its invoices.

For the supplier company, the guarantee of payment and the possibility of collecting invoices in advance are very important elements in its business relationships, as they allow the supplier to avoid cash flow tensions associated with low liquidity. It is common for supplier companies to have debt peaks or for some invoices to accumulate, such as those for the collection of raw materials, before carrying out a job. Thanks to reverse factoring, these companies achieve liquidity immediately. 

For the company that offers reverse factoring, the fact that suppliers know that the company they invoice has a reverse factoring agreement is already a guarantee to do business.  With this formula, the credit institution can bring forward the collection of outstanding invoices and guarantee payment to the supplier, which makes it easier for the company offering payment by reverse factoring to negotiate advantageous conditions with suppliers.

In addition, companies that use a reverse factoring credit facility not only improve their image in the eyes of their suppliers: offering a reverse factoring line of credit also simplifies administrative work since the financial institution processes the information and makes payments at the defined time.

Applications such as the Confirming Remittances API allow companies to send invoice remittances through reverse factoring, making it easier to offer invoice advances to their suppliers. By integrating this API into the client’s systems that can be accessed by suppliers, they will be able to receive advance payments only for the required orders. This allows suppliers to easily bring forward the collection of their invoices and for the client to have a more efficient and healthy cash flow, optimizing their credit facility.

Given the liquidity and image advantages it provides, reverse factoring is emerging as one of the preferred payment methods for companies looking to meet their commitments to their suppliers without putting at risk the liquidity on which their daily operations depend.