Factoring – a valuable tool to boost trade

While factoring is employed as a trade finance tool in many parts of the world, it is not common practice in Africa. But the African Export-Import Bank (Afreximbank) has identified factoring as a valuable tool to underpin trade, particularly for small and medium size enterprises.

Factoring is a technique where an enterprise sells its accounts receivable (i.e. invoices) to a ‘factor’ for immediate payment less a small discount.

Kanayo Awani, Afreximbank’s IATF director, writing in the FCI’s annual report provides a summary of the latest statistics regarding factoring volumes.

Factoring volumes continued to grow in Africa in 2019. It increased from €22bn in 2018 to over €24bn in 2019 representing 10% growth. The growth rate reflects the sustained increase in factoring volumes on the African continent that stood at about €18bn in 2015.

Countries that led this growth included Egypt, South Africa and Tunisia with 13.9%, 12.3% and 7% growth, respectively. Notably, however, several small-sized factoring companies are emerging particularly in Botswana, Senegal, Cameroon, Nigeria, Kenya and Zimbabwe.

Afreximbank continues to play a significant role in supporting intervention mechanisms that are creating opportunities for SMEs to fully benefit from factoring.

Indeed, the development by the bank of the MANSA platform is an important step forward, she writes. MANSA is a pan-African customer due diligence platform that will facilitate African trade by providing a single trusted source of primary commercial data required to conduct due diligence checks on counterparties in Africa. MANSA can advise and inform factor companies as to the risk of default by debtor companies. 

Afreximbank has also advised and supported legal and regulatory reforms to enable factoring throughout 2019.

Types of factoring

There are in fact a number of factor arrangements. The two most important are  ‘recourse’ and ‘non-recourse’ factoring. With recourse factoring, the factor takes the responsibility for debt collection but retains the right to take full recourse from the client for any bad debts.

There is also reverse factoring, where a factor offers suppliers of a debtor the option to assign or sell their debtor-approved receivables, with a guarantee from the debtor. In invoice discounting the financier purchases the sales ledger and advances funds against the approved debt but does not take on the responsibility for debt collection.

By utilising invoice finance, African SMEs can access the cash flow needed to develop new products, approach new customers and ensure they have the resources available to meet any unforeseen costs

By freeing this ‘trapped’ cash, SMEs can look forward to realising their growth ambitions and further contributing to the continent’s economy.

By utilising factoring, SMEs can access the cash flow needed to develop new products, approach new customers and ensure they have the resources available to meet any unforeseen costs.

Yet there are downsides to factoring. The costs associated with factoring vary according to perceived risks.

Some academics also believe that factoring can result in the loss of direct communication and relationships with partners or suppliers.  

Yet the size of factoring in other markets does show that it is a tool that needs to be developed to support the growth of businesses.

Yet cash flow is the lifeblood of businesses, and the pandemic will have taken a toll on payment days. By freeing this ‘trapped’ cash, SMEs can look forward to realising their growth ambitions and further contributing to Africa’s economy. Despite repeated calls for invoices to be settled more promptly, SMEs still suffer from the effects of late payments.

As a result, many small businesses run into cash flow difficulties, forced into taking out an overdraft, and suffering a slowdown in profit growth as a result.

While it is thought that as many as two-thirds of small businesses are paid late by big businesses, yet only 20% of small businesses charge interest for overdue invoices.