CMA Intermediate · Financial Management and Business Data Analytics · Payable Management

Under a reverse factoring (supply chain finance) arrangement, a large buyer such as Tata Motors approves its suppliers' invoices and a bank pays them early at a discount. Which feature best explains why small suppliers benefit?

Small suppliers benefit because the bank prices early payment off the large buyer's better credit rating, not the supplier's own weaker one. The buyer approves the invoice and pays at maturity, so the supplier obtains cheaper, faster finance.

AThe discount rate is based on the buyer's stronger credit standing rather than the supplier's ownCorrect
BThe supplier no longer needs to issue invoices to the buyer
CThe buyer must pay the bank before the invoice due date
DThe supplier's goods are exempted from quality checks

Explanation

In reverse factoring the financier relies on the buyer's approved invoice and credit risk, so the supplier gets cheaper finance than it could on its own rating. Invoices are still issued, the buyer pays at the original due date, and quality checks are unrelated.

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