7 Key Differences Between Factoring vs Reverse Factoring

Recourse and reverse factoring are two financial tools commonly used by businesses to improve their cash flow. Even though they share the same goal of providing immediate access to funds, they still have various distinctions. However, it is important to know more about these two. Here we will discuss the key differences between recourse and reverse factoring.

Recourse Factoring

In recourse factoring, the seller remains liable for the debt if the retailer’s customers fail to pay. The factoring business may make efforts to collect the amount on behalf of the seller; however, this is not guaranteed. If the factoring company fails to collect the amount, the seller may be required to repurchase the invoice and collect the debt directly. Therefore, while recourse factoring provides immediate cash, the seller deals with the ultimate risk of non-payment.

Reverse Factoring

Reverse factoring is a financing technique that involves a third-party financial institution (e.g., bank, factoring company) facilitating payments between a buyer and seller. The buyer assigns their invoices to the financial institution partner, who then pays the seller directly. This allows the buyer to defer payment, improving their cash flow, while the seller receives earlier payment directly, enhancing their cash flow. The financial institution partner assesses the creditworthiness of both parties and charges a fee to the seller and interest rates to the buyer for the financing provided.

7 Key Differences Between Factoring vs Reverse Factoring

Here are seven key differences between recourse and reverse factoring:

Feature	Recourse Factoring	Reverse Factoring
Credit Risk	In this type of factoring, the factoring company assumes the credit risk.	Whereas, in reverse factoring, the corporation bears the credit risk.
Liability	The business remains liable for unpaid invoices. This means the business may have to repay the factoring company.	The corporation is ultimately responsible for payment, even if the supplier fails to deliver goods or services.
Discount	The business receives a discount on the invoice amount	Suppliers typically receive the full invoice amount without a discount.
Flexibility	Businesses have more options when choosing factoring companies.	However, in reverse factoring, suppliers may have limited options.
Structure	This type of factoring is less structured.	This type of factoring is more structured.
Cost	Costs can vary as per factors like creditworthiness and industry.	Costs can be lower for suppliers due to the full invoice amount.
Eligibility	It varies as per several business factors	It often requires strong supplier relationships.

By understanding these key differences between recourse and reverse factoring, businesses can make informed decisions about which option suits them the best.

 After understanding the basics of the concepts of recourse and reverse factoring, let's explore the M1 Exchange, a leading platform in India for factoring.

Three businesses received "in principle" clearance from the Reserve Bank of India (RBI) on November 24, 2015, to establish the Trade Receivable Discounting System (TReDS) platform. Mynd Solutions Pvt Ltd is one of the three companies that, in compliance with the Payment and Settlement System (PSS) Act 2007, launched the TReDS platform "M1xchange" on April 7, 2017.

The purpose of M1xchange's was to meet the financing needs of all micro, small and medium enterprises (MSMEs) throughout India. Through the exchange, MSMEs can obtain funding by turning their trade receivables into liquid assets without requiring recourse. This provides businesses with a reliable way to improve their cash flow and manage their receivables.

M1xchange has been achieving new heights of success through:

●       Encouraging collaboration and teamwork to achieve shared goals.

●       Fostering a culture of strong leadership that inspires and empowers employees.

●       Building long-lasting relationships with customers based on trust and satisfaction.

●       Creating a supportive environment that enhances personal and professional growth.

●       Prioritising sustainability in all aspects of the business, from operations to product development.

Conclusion

Businesses frequently employ recourse and reverse factoring as financial strategies to increase their cash flow. Recourse factoring is a valuable tool for companies that require immediate cash, want to improve their financial management, or need to mitigate the risk of bad debts. Reverse factoring is a valuable tool for businesses that want to optimise their working capital, improve their supply chain relationships, and reduce their financing costs. Mynd Solutions launched M1xchange in 2017 to help MSMEs get funding by discounting their trade receivables, improving their cash flow and managing receivables.

By understanding and considering these general differences between the two, such as credit risk, liability, discount, flexibility, structure, cost and eligibility, it becomes straightforward for businesses to choose.