The determinants and consequences of reverse factoring: Early evidence from the UK

Abstract

Our study examines the determinants and consequences of reverse factoring. Despite the increasing popularity of reverse factoring, neither US GAAP nor IFRS offers any guidance for the financial reporting of obligations owed under reverse factoring. Using a sample of UK firms from 2018 to 2020, we find that a buyer is more likely to adopt reverse factoring if it is larger, uses more trade credit, depends more on external financing, and has lower return volatility. In our tests of consequences, we find that, compared to firms that do not use reverse factoring, the average firm that adopts reverse factoring takes 10.5 days longer to pay its invoices, pays 12.2% fewer invoices within 30 days, and pays 13.6% more of its invoices later than 60 days. We also document several favorable accounting outcomes for firms that have adopted reverse factoring, such as reporting a higher ROA, higher profit margins, lower ROA volatility, and lower return volatility than firms that have not adopted reverse factoring. Our study contributes to the nascent literature on reverse factoring by empirically building a profile of the type of firm that adopts reverse factoring.