Can Factoring Help African Smes With Their Bills?

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can factoring help african smes with their bills

In April this year, the African Export-Import Bank and FCI, the global representative body for factoring, hosted a two-day conference in Harare. The event focused on how factoring, a form of finance in which businesses sell their invoices to a third-party in order to bolster their short-term liquidity, can empower economic growth and serve as a catalyst for the financial inclusion of SMEs.

The conference comes at a time when the practice of factoring is on the rise in many markets but has yet to find much of a footing in Africa. Factoring appeals to many businesses because it drastically reduces the amount of time they have to wait to receive payment on their outstanding invoices. While they have to pay a commission to the third-party who buys the invoice, factoring can help free up firms balance sheets, fuelling higher investment and growth.

According to the FCI, the annual turnover for factoring companies globally reached over 2.7tn in 2020. However, in 2022, Africa only accounted for around 1% of global factoring volumes and the small amount of factoring that did take place was disproportionately concentrated in South Africa, Morocco, and Egypt, which together accounted for approximately 98% of African factoring volumes.

Yet to gain traction

Jack Hermann-Ntoko, chief operating officer and co-founder at Paris-based factoring company TradeIn, tells African Business that factoring has yet to gain much traction in Africa.

The main reasons for this include a lack of awareness and understanding of factoring solutions, as well as a lack of regulatory and legal frameworks, he adds. Market fragmentation, Africas diverse economic conditions, languages, and currencies can make it difficult to implement a unified strategy for factoring services. A lack of supportive institutions such as credit rating agencies and trade associations further impede adoption.