Economist reports on how factoring takes advantage of buyers’ low credit risk to pay suppliers’ invoices promptly. “The buyer—a large supermarket chain, say—approves a supplier’s invoice and transmits it to the fintech lender. (The lender can raise money in different ways: Greensill raises funds in the capital markets.) The lender pays the supplier on the agreed date or, if requested, earlier, less a small discount. With interest rates at present low, the period of finance short and the credit risk that of the supermarket chain rather than the supplier itself, the discount may be so low as to be almost unnoticeable. The lender later collects the full value of the invoice from the buyer. This improves the cashflow for suppliers without shortening payment terms for buyers, freeing up working capital for both parties and creating a healthier, more secure supply chain.”
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