Longer payment periods

Upon delivering the goods or performing a service, the supplier will inevitably issue an invoice. Its amount is just as important as the payment period. No matter how long it is – a few days of extension are always worth gaining. At the same time, the reputation of a reliable and timely payer enables the buyer to maintain good relationships with the supplier, continuity of supply and even to negotiate more favorable prices and discounts in return for the guarantee of the timely payment. These seemingly contradictory goals can be achieved by using the reverse factoring service, which is offered by an increasing number of banks and factoring institutions.

Contrary to the traditional factoring, the factor, at the request of the buyer and under a framework contract, finances the suppliers chosen by the buyer.

Broadly speaking, the process looks as follows: after the buyer has received the goods and accepted the invoice, the invoice is handed over to the bank or the factor that pays for it. Depending on the agreements with the buyer, the factor makes the payment immediately (if the aim is to provide the supplier with the working capital) or on the due date. Finally, the supplier makes the payment to the bank on the specified date (it can be the invoice due date or an additional extended financing period – it all depends on the terms of cooperation with the factor).

By indicating the guaranteed source of financing and the possibility of early payment for the invoice, the buyer can get longer payment periods from suppliers or additional discounts. For the supplier, reverse factoring constitutes a source of additional off-balance sheet financing (without recourse) without the need to evaluate the credit worthiness and to provide collateral security.

The bank service designed in this way is usually used by large, financially stable companies in their relationships with selected smaller suppliers who experience more difficulty in getting access to external sources of financing. Both parties benefit from the increased mutual trust in business relationships and closer cooperation. Furthermore, both the buyer and the supplier gain more financial flexibility.

SAP adjusted

The service is performed using the electronic banking system. In order to ensure efficient communication between the IT systems of the payer and the bank, it is necessary to agree on the format of the transmitted purchase invoice data and the payment information. It is usually the factor who defines his expectations and imposes the data format which is adequate for his system.

In order to use the reverse factoring service at ING Commercial Finance Polska, one of the factoring market leaders, it is necessary to make several adjustments in the SAP system of the buyer. A project of this nature has been carried out by SNP for one of its customers, a large FMCG company using a broad range of SAP ERP functions, which offered a reverse factoring program to several dozen of its suppliers.

The adjustments made include to some extent creating additional functionalities in SAP as well as using the existing ones in a slightly different way. However, it should be noted that the implemented solutions do not interfere in the previously defined system configuration and the way of keeping record of settlement items related to the company’s accounts payable.

The basic element of the entire solution is a configuration table for entering information on the suppliers who have been included in the reverse factoring program by the payer. In order to maximize the flexibility of the solution, it has been decided to make the entries time-dependent. In this way, the method used for the settlement of accounts payable to a given supplier can be different in different periods, depending on the trade contracts signed or a production period. The payer has also an insight into the current information on when a particular supplier was covered by the program and when he was not. If the supplier quits the program, the invoices are paid using a traditional method, i.e. directly to his bank account.

Every day a file containing invoices is generated on the basis of the data from the aforementioned table and the invoices are sent to ING. The fact of sending a particular document to the bank is recorded in the status table. On the one hand, this prevents the same documents from being sent several times and, on the other hand, allows statuses to be reported for individual documents.

The described mechanism of the invoice data collection from open items of the suppliers who participate in the program generates a flat file whose structure is consistent with that defined in the ING documentation (the files can be saved locally or on the application server; they are sent to ING via the Internet). This facilitates the communication between the systems and eliminates the risk of errors since all the information is transmitted electronically.

On the basis of the information received from the payer ING generates transfer orders for the company’s accounts payable. After the transfer orders have been executed, ING sends the customer the file with data on the payments made in reference to the previously received invoices. The file is subsequently imported to the SAP system with a special tool which updates statuses of the documents regarding the accounts payable covered by the reverse factoring process.

Key benefits of reverse factoring

For the buyer:

  • improvement of relationships with the suppliers through getting access to a source of financing
  • the possibility of negotiating longer payment periods or additional discounts from the suppliers in the case of early or timely payment of amounts due
  • extension of an accounts payable payment period thanks to an additional repayment period allowed by the factor

For the supplier:

  • an additional source of financing, without the need to provide any security
  • financing without recourse, based on the buyer’s risk
  • the working capital acquired is not a financial liability (but the early payment of receivables)

The elements described above have streamlined the process of communication with ING. To complete the whole process, amounts due to ING must be paid. To this end, a standard functionality of the automatic payment program in the SAP system has been used. It generates transfer orders for the suppliers’ documents on their due dates.

In order to make sure that transfers are generated to the appropriate bank account, information on the alternative payee has been entered into the master data on the suppliers who participate in the program. This functionality ensures that the transfers for the suppliers taking part in the program are always generated to the bank account of ING.

In addition to financial benefits, the reverse factoring service offered by ING provides also additional facilities related to accounts payable management. Electronic data exchange between all three parties involved provides both the buyer and the supplier with full information on the settlements and enables them to maintain control thanks to the reports made available by the banking system.

The buyer has access to the reports on the invoices purchased and financed, a clearing account statement generated once a week, and a report with open items. Once a month, a cost invoice is issued. The buyer receives the confirmation that the receivables have been posted and the report on the receivables which will be due in the chosen number of business days.

Easy communication

The deployment of additional functionalities in the SAP system to support the process is necessary if the company wants to use the service offered by ING extensively. However, the introduced changes also bring certain benefits to the payer. The process of delivering the invoice data to the factor is optimized and automated, which eliminates the risk of errors during the data transmission process. The solution allows for flexible determination of the suppliers who are to join the program and the period of their participation.

The whole process is performed without using any paper documents; all information is exchanged electronically (sending invoices, advancing funds, reports for the buyer and the suppliers).