Module I· Working Capital & NWCAdvanced
Question
What is reverse factoring (supplier finance), and why is it a balance-sheet risk?
Answer
Mechanism
the buyer (a middle-market company) extends its payment terms to suppliers from 30 → 90 days. A bank is inserted in between: the bank pays the supplier immediately (at a discount), and the buyer pays the bank at 90 days. Effects:
- Supplier: gets cash faster (positive, but at a discount).
- Buyer: AP ↑, DPO ↑ → NWC falls → OCF rises.
- Bank: earns a margin on the discount. Accounting issue: reverse-factoring liabilities are often carried as 'trade payables' (an operating liability) even though economically they are bank debt.
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Consequence
reported net debt understates true leverage, and reported OCF overstates operating cash generation. Real-world cases: the Carillion insolvency (UK, 2018) and the Greensill collapse (2021) — both escalated through hidden reverse-factoring volumes.
Pitch tip
'identify reverse factoring in DD — at middle-market companies often $50–200m of hidden debt; show it separately as a debt-like item in the EV-to-equity bridge'. IFRS tightened disclosure requirements in 2023 (IAS 7 amendments), but risk assessment remains a manual DD task.