What is green reverse factoring? Understand what it is and how it works.
Reverse factoring, also known as Anticipation of Receivables, is a Credit Assignment product that helps the supplier to obtain immediate liquidity without credit analysis, because the anchor, owner of the supply chain, offers the program for its suppliers to use its risk and credit limit to have ease and better conditions in the operation.
An Example would be, an Anchor has bought products from the supplier and the payment term is 120 days. The program allows this supplier to anticipate its invoice and receive credit today with the deduction of a discount rate, through negotiation with lenders. However, the conditions are more favorable since it is the anchor’s credit risk.
Green reverse factoring is based on the same operational logic, but it includes an ESG assessment which is made for all participating suppliers. This assessment enables the addressing and understanding of ESG risks, contributing to their mitigation. In addition to the ease of obtaining credit, it is also possible to obtain better financial conditions through a good ESG assessment. This results in sustainable operations and an evolution in the participants’ ESG agenda.
arara.io is the only digital platform that offers this service.
How does the process work?
The Green reverse factoring involves 4 parts:
- Anchor – supply chain owner and risk taker, seeking to address ESG in the supply chain
- Supplier (grantor) – Participant in the Anchor’s value chain, seeking to anticipate receivables for working capital and ESG assessment
- Financier (lender) – Banks, Financial Institutions, Anchor Fund, etc. – Seeking to expand portfolio of green assets
- Digital platform – with advanced technology for ESG assessment and anticipation of receivables.
Anchors committed to reducing their carbon footprint, fighting climate change, addressing ESG risks, and having a more robust supply chain join the digital platform through a partnership.
Anchor immediately offers the program to its suppliers where they will have access to anticipate receivables and ESG assessment. Suppliers receive instructions on how to improve their ESG footprint and access invoices that are made available by the anchor.
Lenders assess the anchor’s credit risk with the ESG risk obtained through the platform assessment and offer their terms for anticipation. The supplier has access to all offers and chooses the ones that fit his needs and receives the payment on the day. On the due date, Anchor makes the payment directly to the lender.
arara.io makes this possible through the digital platform that has technology for financial flow and also an Artificial Intelligence that incorporates an internationally accepted ESG taxonomy along with global environmental and social performance standards, providing financial technology solutions for buyers and suppliers. arara.io is the only digital platform to integrate climate and credit analysis, offering a cohesive approach to support and promote profitable and smart ESG supply chains. It offers flexible liquidity programs along with a sustainability framework designed to improve overall performance.
What are the advantages of green reverse factoring?
Green reverse factoring brings several benefits to everyone involved in the program – Suppliers, Anchor, and Lender. Besides the benefits of traditional reverse factoring, it also provides several benefits related to sustainability and ESG risk management. See below the exclusive benefits of this modality:
For the Suppliers
The program allows anticipation of receivables, evaluates, and provides insights on climate change mitigation, ESG footprint improvement, and operational advancement. It also significantly improves supplier liquidity, while increasing awareness of the ESG agenda and expanding opportunities.
- Significant improvement in liquidity through substantial reduction in accounts receivable days
- Differentiated pricing through sustainability performance
- ESG and environmental footprint awareness
- Potential new business opportunities through alignment with climate change mitigation and sustainability
For the Anchor
By combining traditional reverse factoring with analysis and assessment using ESG metrics, the program enables Anchor Clients to reduce their carbon footprint by proactively building a sustainable supply chain, while better supporting their suppliers financially and reducing ESG risks.
- Analysis and mitigation of sustainability risks
- Improved financial cycle due to term lengthening with suppliers.
- Obtaining instructions on reducing suppliers’ carbon footprint and ESG risks
- Recognition and support of sustainable suppliers in the network
For the Lenders
The Lenders gains visibility and access to a comprehensive portfolio of pre-screened and qualified sustainable financing opportunities. The Program works in a fully intuitive manner and facilitates integration into a fully transparent ecosystem with fully digital processes.
- Access to a portfolio of pre-assessed sustainable assets
- Credit is from the Anchor Client, therefore lower risk
- Visibility of the combination of credit risk and sustainability assessment
- Access to a digital platform that combines drawn risk and ESG assessment integrating credit and sustainability