Breaking the last Factoring Frontier

Considerations for starting Full-Service Factoring companies in Africa.

• The importance and role of SMEs cannot be underestimated. Recent reports indicate that they represent 90 % of all business and are creator of two thirds of all jobs worldwide.
• There is a however large finance gap and SMEs indicate they need supply chain linked solutions like working capital finance. Factoring fills this gap in many countries up to 5-10 % of GDP.
• But according to the FCI 2022 statistics of worldwide factoring turnover Africa counts for only 1.14 % of worldwide turnover and of the 4000 factoring companies 185 exist only in Africa of which 110 In South Africa. Until recently factoring had been of little importance in Africa other than the North and East 10 % and 90 % South Africa. Independent factoring companies are few.
• What is unique about factoring is that the finance provided by a factor is explicitly linked to the value of a clients accounts receivable portfolio and is less dependent on overall creditworthiness.

 

 

Full-Service Factoring, Reverse factoring and Invoice Discounting.

 

Full-service factoring is an overdraft facility for a business (usually an SME)  that transfers its entire accounts receivable portfolio i.e. all debtors and non-cash invoices to a third party called a factor for a prepayment on approved or eligible receivables.

In addition, the credit management function looks at a healthy development of the portfolio avoiding too much concentration, disputes and the money flow on the various payment channels.
Full-service factoring is usually done by one factoring company only collecting all the datapoints about the portfolio characteristics.

Main collateral is the A/R portfolio while the banking relation holding all other assets (all asset debenture) remains intact. Cost is a turnover based factoring commission for credit management and credit insurance when available and an interest based on the actual outstanding prepayment total.

Invoice Discounting is invoice finance based on the transfer of a single or batch of single invoices against a predetermined discount rate independent of the actual payment behavior.
Multiple finance companies could be involved in various batches of single invoices. Since the entire portfolio is not transferred no datapoints regarding the entire portfolio are collected resulting in a one-dimensional approach.

 Reverse Factoring is a facility provided to a corporate or anchor debtor in a supply chain allowing for pre-payment of his payables to the SME seller.

 

 

Domestic Full-Service Factoring In African context.

 From single invoice to a multi-dimensional rugged portfolio approach

 

Domestic full-service factoring deals with the relationship that exists between suppliers often SMEs and buyers in a supply chain. Clients sell goods or services to debtors and serve as financier to their buyers but need to accept lengthy payment terms, sometimes as much as 120 days. This creates severe liquidity pressure – a situation further aggravated by the reluctance of commercial banks to embrace SME banking and provide working capital when and where it is needed most. Therefor full-service factoring companies that monitor the entire debtor portfolio in a holistic manner could help bridging this gap and resulting in less risk loss resulting in working capital at sustainable interest rates.

 

Setting up an low cost independent factoring company.

Key Operational procedures

 

Acquisition, Credit Proposal and Onboarding.
Control of the transferred invoiced sales volume.
Determination of the credit availability.
Amical and legal collection and payment processing
Verification and solving disputes.
Risk management based on KPI s related to disputes credit notes dilution and liquidation ratio.

• In addition, a “Trusted Eco System”

Due to the lack of credit insurance and therefor the higher risk involved in factoring in Africa a more robust/rugged approach to better control sellers and buyers in a supply chain is  the setup of a “ Trusted Ecosystem.”
This is a combination of factoring and reverse factoring whereby in a diversified factoring portfolio at least one corporate buyer exist that allows prepayment of their payables to the factoring client.
As a result, a deeper insight in the client’s portfolio movements is achieved.

 

Setting up an low cost independent factoring company

The asset side.

A good number of good software platforms exist in the market.
They mostly are cost effective and scalable.

They enable monitoring key operational procedures on their platform.
By means of risk ratio, s and parameters known and unknown risks are recognized and dealt with in an early stage.
Installation and start-up cost is scalable and operations start with a three to four headcount for Commercial Risk and Credit Management functions.

 

Setting up a low cost independent factoring company

The liability side

 It is notoriously difficult to start up a greenfield operation in Africa due to the lack of funding opportunities. A combination of DFI and the commercial market through blended funding could be an option.
In order to bundle a number of initiatives an African Factoring Fund aimed at assisting in setting up a number of independent factoring companies could  prelude larger scale introduction of Full Service Factoring.
For $ 50 million 30 independent factoring companies all across Sub Saharan Africa could be provided with $ 1 million funding or local currency equivalent line to commence operations.
Some of these startups may fail but the majority will survive their first two years and obtain regular funding.

The startups choose their own platform able to upload data to the African Factoring Funds monitoring function in a peer to peer and consulting frame work supported by an existing software platform.
Auctioning and other funding platforms will play an important role allowing new developments like collateralized loan structure.

The legal structure will be guided by new regulation based on Unidroit Model Law on Factoring and the Afreximbank Model Law on Factoring.

Training and capacity building could be done by institutions such as FCI and Afreximbank.

Full-service factoring with credit management and a “Trusted Eco System “will allow for obtaining much more datapoints than with invoice discounting and reverse factoring resulting in less non-performing loans and thus more sustainable interest rates.

Furthermore, these portfolio datapoints will be the “connector “or “API “for new supply chain finance initiatives such as deep tier finance.

Breaking the last factoring frontier could be a gamechanger in the African market.