Micro, small, and medium-sized enterprises (MSMEs) are the backbone of Latin America and the Caribbean (LAC), yet their growth continues to be constrained by a persistent and sizable financing gap – estimated at nearly $1 trillion, one of the largest in the world.

A central challenge is the cash conversion cycle. Many MSMEs deliver goods and services upfront but face payment delays of 60 to 120 days. For smaller firms with limited access to credit, this creates cash shortages that make it harder to take new orders, invest in production, or even pay workers.

Reverse factoring (RF) offers a scalable solution to address this issue across the supply chain. Unlike traditional factoring – where lenders must verify each supplier's invoices and assess their credit risk – RF relies on a large, creditworthy buyer (anchor firm) to confirm invoices and guarantee payment. This reduces risk for financial intermediaries, allowing them to provide faster financing to MSMEs at lower cost, often without requiring collateral or a strong credit history.

This model represents a shift from firm-level lending to supply chain finance, in which liquidity aligns with commercial relationships.

From Liquidity Relief to Growth Acceleration

Emerging evidence from Mexico shows that RF is not merely a liquidity management tool – it can propel firm growth.

An IDB Invest study found that the adoption of RF is associated with an estimated 27% increase in firm sales, equivalent to an average gain of approximately $190,000 within the first year.

This effect reflects more than improved cash flow. By reducing the need to "self-finance" their buyers, firms can reallocate working capital toward core business activities such as procurement, production, and market expansion. In doing so, RF strengthens both firm performance and supply chain resilience, facilitating smoother transactions and reducing disruptions linked to liquidity shortages.

Expanding Markets by Gaining New Customers

A key insight from the analysis is that sales growth is driven primarily by companies acquiring new customers, rather than increasing sales to existing ones.

Following RF adoption:

• The number of active clients increases by over 40%.
• Firms add, on average, several new customers within a relatively short period.

By easing working capital constraints, RF enables MSMEs to pursue new commercial opportunities that would otherwise be considered too risky under tight cash flow conditions.

By contrast, the data show no statistically significant increase in sales per client, actually indicating a temporary decline. This pattern is consistent with sales diversification: firms expand their client base, including smaller or newer buyers, while maintaining stable relationships with core clients. From a risk perspective, this diversification reduces dependency on a limited number of large buyers and enhances business resilience.

The Importance of Sustained Use

The benefits of RF are not automatic. They depend on consistent use over time. Firms engaging with RF for three or more quarters experience stronger and more persistent gains versus those that only use the tool occasionally.  

Experiencing these gains, firms learn that RF is a reliable financing tool that they can incorporate into their strategic decision-making, enabling them to:

• Bid for larger contracts
• Engage in longer-term production cycles
• Optimize inventory and input purchasing

Addressing Concerns About Payment Terms

A recurring concern is that RF could come with implicit costs for MSMEs, particularly if buyers extend payment terms in exchange for facilitating access to financing.

However, a survey of MSMEs carried out to complement the analysis found the exact opposite:

• 84% report no change in payment terms after adopting RF.
• Over 60% report lower financing costs.

These findings suggest that RF can offer a win–win solution, improving access to affordable finance without imposing additional burdens on suppliers.

From Financial Instrument to Development Strategy

RF illustrates a broader shift in how MSME finance can be structured. Rather than relying exclusively on collateral-based lending, RF embeds financial solutions within existing commercial relationships, leveraging information and trust across the supply chain.

For development institutions and policymakers, the implications are clear:

• Closing liquidity gaps can generate immediate and measurable growth effects.
• Supply chain finance can complement traditional credit markets, especially for underserved firms.
• Sustained access, not just one-off interventions, is critical for impact.

As the region seeks to close its large MSME financing gap, instruments like RF offer a promising pathway by transforming liquidity from a constraint into a shared strategic asset across the supply chain. 

Link to the study  

Link to the DEBrief