African Export-Import Bank (Afreximbank) has frowned at the absence of Nigeria on the global factoring business that is currently worth 2.3 trillion Euros despite its potential to boost both domestic and export trade.
A factor is a financial intermediary that purchases receivables from a company.
A factor is essentially a funding source that agrees to pay the company the value of the invoice less a discount for commission and fees. The factor advances most of the invoiced amount to the company immediately and the balance upon receipt of funds from the invoiced party.
Ms Kanayo Awani, Managing Director, Intra-African Trade Initiative at Afreximbank who provided insights into Factoring at a workshop on Factoring and Model Law in Nigeria in Abuja said this is an easy way for manufacturers and other businesses to sidestep running out of cash during the intervening period between supply and payment.
According to her, an exporter or supplier sells its accounts receivable to the factor at a discount in exchange for immediate cash with which to finance continued business.
Explaining further how it works, Awani said after a buyer places order with supplier, the factor evaluates credit worthiness of buyer.
The factor then approves the buyer after which supplier ships product to buyer. Supplier invoices customer and assigns invoice to Factor who pays supplier with reserve. Factor collects fund from buyer and then pays supplier difference.
Although factoring is a relatively expensive form of financing as the factor takes a percentage of the profit, factors provide a valuable service to companies that operate in industries where it takes a long time to convert receivables to cash, and also to companies that are growing rapidly and need cash to take advantage of new business opportunities.
She observed that in Africa, most factors are relatively small in capitalisation and turnover; credit cover is offered selectively, subject to availability of insurance; services limited to purchase of debtors and sales ledger management and; due to limited credit insurance capacity, services offered by factors are limited.
Statistically, she revealed that of the 2.3 trillion Euros World factoring transactions recorded in 2015, Africa accounted for only 0.7 per cent while only five African countries – South Africa, Morocco, Tunisia, Egypt, Mauritius, accounted for almost all of this share.
At the workshop, a model Factoring Assignment Act 2016 was discussed by participants, which would be submitted to relevant authorities for onward presentation to the National Assembly for legislation even though in some countries like Britain, there is no formal laws governing factoring.