The African Export-Import Bank (Afreximbank) is strongly in support of factoring as a viable alternative financing instrument for supporting Small and Medium-sized Enterprises (SMEs).
This disclosure was made by Ms. Kanayo Awani, Managing Director of Afreximbank’s Intra-African Trade Initiative and Chairperson of FCI’s Africa Chapter, during the opening of a virtual workshop that focused on “Opportunities for factoring in Africa, that access to finance for SMEs would play a key role in intra-regional trade under the AfCFTA.”
Factoring is a financial transaction and a type of debt financing in which a business sells its receivables (outstanding invoices) to a third party/agent (called a factor) at a discount. It is a form of selling the receivables to an agent at less than its full value.
According to her…
- “SMEs constitute the greatest proportion of the continent’s industrial fibre, accounting for about 80% of businesses and employing not less than 70% of the continent’s workforce.
- “Given that access to finance remains a key constraint to SME operations, availability of sustainable trade finance, especially for SMEs, will remain the key lubricant to propel the AfCFTA, the single largest trading bloc globally, towards the realization of its aspirations.
- “The Factoring volumes in Africa grew by 10% to EUR 24 billion in 2019 with Afreximbank supporting this growth by providing financing to emerging factoring companies in Cameroon, Senegal, Congo, Zimbabwe, Botswana and Nigeria.
- “The Bank also developed and launched a Model law in 2016 and seeks its adoption and implementation by engaging government officials, legislators, relevant African regional organizations, and regulators to improve the legal and regulatory environment for factoring.
- “Egypt, for instance, reviewed and promulgated a new factoring law in 2018 using the Afreximbank Factoring Model Law as Guide and this has contributed to the sharp growth in Factoring activities.
Why this matters
- SMEs would benefit immensely from using the factoring window to increase their cash flow, as money is also needed to grow the business as well as keep up with rising order numbers, within the constraint of low working capital.
- An SME that wants to meet its present and immediate cash needs can always factor its receivable assets at a discount that largely depends on the risk grade of the receivables involved.
- Factoring is not technically a loan and thus will not add to a company’s debt or tie up collateral that may be required to secure other bank loans or facilities.
- Cash is King – liquidity as well as improved cash flow matter a lot for any enterprise that wants to grow its business and meet its obligations as at when due.