Intercreditor Lien Carveouts Supporting Supply Chain Finance Borrowing Base Expansion
Intercreditor lien carveouts expand asset-based availability by isolating supplier-financed collateral through structured subordination and reserve caps.
Reverse Factoring Reserve
Meaning
Financial reserves in supply chain finance protect the funding bank from losses due to commercial disputes between buyers and sellers. A reverse factoring reserve is a percentage of the invoice value retained by the factor to cover potential credit notes, returns, or quality claims. This reserve reduces the amount of cash advanced to the supplier when an invoice is uploaded.
It is held until the buyer pays the invoice in full.
Risk Management
Lenders calculate the reserve percentage based on the historical rate of returns and dilution of the supplier. This reverse factoring reserve ensures that the lender has a buffer if the buyer refuses to pay the full invoice amount due to defective goods. The buffer protects the lender’s yield on the transaction.
Funding Mechanism
Suppliers receive the majority of the invoice value immediately upon confirmation by the buyer. The remaining portion, which constitutes the reserve, is locked in a non interest bearing account. Once the buyer pays the factor, the reserve is released to the supplier.
Settlement Process
Reconciliation occurs at the maturity date of the invoice when the buyer makes the final payment. If no disputes arose during the shipment, the full reserve is returned to the supplier’s account. This payment completes the factoring transaction.