Reverse factoring has attracted significant media attention and government scrutiny in recent months. The AFR has reported recently that reverse factoring is being utilised by major corporations across a variety of sectors, including construction, energy & resources and telecommunications, as a means to improve liquidity and to offer expedited payment of invoices.

The practice has also raised concerns amongst accountants given its potential to mask total debt. Whilst some companies have well established reverse factoring procedures, others have recently pulled back from adoption of reverse factoring as a result of media, government and public pressure.

Both Principals and Head Contractors may wish to consider adoption of reverse factoring as a liquidity tool. Conversely, contractors, subcontractors and suppliers may be "invited" to enter into reverse factoring arrangements and need to understand both the cashflow implications and their legal rights.

One important factor which appears to have been overlooked in the recent media coverage is the interaction between reverse factoring as the proposed solution for extended contractor payment regimes on the one hand and, on the other, the operation of mandatory maximum payment provisions under Security of Payment (SOP) legislation applicable to the performance of construction work and the supply of related goods and services which apply in some jurisdictions.

This article explains how reverse factoring operates and considers the rights and options available to Principals, Head Contractors and subcontractors considering adoption of reverse factoring (including the operation of mandatory maximum payment periods under legislation which override the imposition of extended payment durations proffered as the alternative to reverse factoring).

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