Factoring in Ireland and the UK worth more than €400 billion.
Last week we discussed how reverse factoring works. Now we look at how it works in a little more detail.
Broadly there are two different objectives from the originator for such schemes:
1) Supplier focused – to support smaller suppliers
2) Company focused – to support the originator’s working capital management and financing.
Whilst these two objectives are quite different, it is often difficult to assess from the available disclosure what the company’s objective is.
Normal payment terms might see a purchaser pay a supplier within thirty days. The switch to a reverse factoring facility might also see the payment terms increase, to as much as 120 days, as the facility provider will agree terms with the originator. Any increase in payment period will have the effect of improving the originator’s working capital cycle.
How prevalent is reverse factoring?
It is difficult to get accurate and up-to-date data but the European Factoring Association estimates that the total of factoring and reverse factoring for the UK & Ireland combined was £350bn (or over €400bn) in 2017.
Collapse of Carillion
According to a January 2018 analysis by the London Business School (LBS), Carillion used reverse factoring to its detriment.
Carillion was less than transparent about this arrangement in its 2016 financial statements. The facility was recorded in Carillion’s balance sheet within ‘other creditors’ of £760.5 million, on page 118 of the 2016 financial statements – without any explicit note.
More to follow next week in our last blog on reverse factoring.
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