Login

Lost your password?

Sign Up

Register

Login

Login

Lost your password?

Register

Thursday, August 18, 2022
  • Home
  • Banking
  • Industry & Trade
  • Investing
  • Money Deals
  • Regional Markets
  • Tech & Biz
  • Countries
  • Opinion

Africa's
Investment
Gateway

The Exchange
  • Login
  • Register
Subscribe
This Month's Edition
Previous Editions
  • Home
  • Banking
  • Industry & Trade
  • Investing
  • Money Deals
  • Regional Markets
  • Tech & Biz
  • Countries
  • Opinion
No Result
View All Result
The Exchange
  • Home
  • Banking
  • Industry & Trade
  • Investing
  • Money Deals
  • Regional Markets
  • Tech & Biz
  • Countries
  • Opinion
No Result
View All Result
The Exchange
LOGIN
Invoice Image

Invoice Image

Invoice Factoring – A great service & fantastic African business opportunity?

In Europe many businesses use “factoring” to improve their business cash-flow and reduce the time they spend trying to collect money.

by Opinion
February 18, 2021
in Money Deals
0
Share on FacebookShare on LinkedIn

None of us particularly like money-lenders and few of us would want the stress and unpleasantness of being the type of money-lender that proliferates in cities like Kampala – leeching returns of 10% a month against assets pledged by desperate borrowers.  The reason that these bloodsuckers can exist is that access to credit on reasonable terms, or at all, from banks is still so difficult to get for most businesses.  

Also Read: Mobile money loans affecting banks’ lending – report

The fact is that there are some great businesses that cannot grow and often struggle to survive because cash-flow is such a huge problem. In Europe many businesses use “factoring” to improve their business cash-flow and reduce the time they spend trying to collect money. But the truth is that the banks that provide this service are so selective about the businesses they deal with and the invoices they process that the service is unwieldy. And that is where a mutually beneficial opportunity exists for both cash-strapped East African businesses and investors wanting a better return on their money.   

Also Read: Africa Finance Corporation over subscribes second CHF bond

The Service – Invoice Factoring 

Factoring is a type of short-term accounts receivable financing, where you effectively ‘sell’ your outstanding invoices to a third-party. Sometimes, there’s a gap between when you finish a job and send an invoice and when the client returns payment and this is where invoice factoring can add value. 

The terms of factoring deals are different in many situations, but most factors advance businesses between 60 and 80 percent of the value of the invoices. You get your cash, and the factor takes on the responsibility for getting payment from those customers, managing the credit control of the business, and processing invoice payments. This means that your customers will be aware of your relationship with the factor.  

With factoring, the factoring company takes over the management of your sales register and credit control process. They also actively chase customer payments on your behalf, meaning you can do away with the time and cost of credit checking your customers, which is especially important if credit control has been poor in the past. You are given advance funds for individual invoices. Any adjustments to the funds you receive are made on a day-to-day basis. 

The pros… 

  1. The finance company will look after your sales ledger, administer the credit control process, and chase payments, freeing up your time to manage the business. 
  1. Excellent credit checking processes mean you are more likely to trade with customers who pay on time. 
  1. Working with a factoring company can sometimes help you negotiate better terms with your suppliers. 

The cons… 

  1. Your customers may prefer to deal with you directly. 
  1. The additional services provided by a factor do come at a cost. The management fees for a factor can be anything from 1.5 to 3.25 percent of turnover. 

Any business which invoices from 30-90 days would be a typical candidate for accounts receivable financing. Equally, a business which has a smaller number of clients owing a higher value of invoice means there is a particular cash-flow vulnerability to late payments. 

Certain industries tend to utilise invoice finance more than others, including: 

  • Construction 
  • Manufacturing 
  • Logistics 
  • Printing 
  • Recruitment 
  • Security 
  • Transport 
  • Wholesale 

If you have a smaller business that has had problems with credit control and collecting payments in the past, for example, factoring is a very good option.  

The Investment Opportunity 

So, factoring as a concept is pretty straightforward. Company A does the work for Company B. Company A´s bank invoices Company B and advances Company A the majority (60-80%) of the money they are owed. The bank collects the money and passes it on to Company A minus the money it has advanced, the interest on that advance, and the fees for operating the service. 

In practice the banks make it much more complicated. They do not allow “concentration” beyond 25% of the facility so if you have a small number of big spending clients then the bank will only advance 25% of the invoice total. They underwrite every client and every invoice separately, and they are probably less effective at collection than you are. They also do not like certain industries and certain products and so, as always, they hold all the cards. They have made a very simple service way more complicated that it needs to be. 

That level of complexity, the banks’ attitude to clients, and the very high charges mean that most East African businesses, particularly the smaller ones, do not consider factoring a viable option. 

Also Read: East African Trends: The storm that is in the equities market 

K.I.S.S. is an acronym that is close to my heart. It stands for “Keep It Simple, Stupid!” And I genuinely believe that there is a great opportunity to make this easy for the business-owner and profitable for the investor. It does not involve vastly complicated systems and offers a fair deal to both the business and the investor. It is also far less risky than a simple loan. It works like this: 

  • As an investor I offer businesses that I like and trust an invoice factoring service on an invoice by invoice basis. 
  • If I like the business that is supplying AND the business or individual who is purchasing I agree to the transaction and I invoice the purchaser directly. 
  • Once the invoice has been accepted by the purchaser I pay 60-80% of its value to the supplier immediately. 
  • I then collect the invoice payment in full from the purchaser. 
  • I deduct my charges for the service – say central bank rate (Uganda 8% pa today), plus a margin of say 4% pa, plus a 2% processing fee.  

An example: 

  • a brick-making company sells 200,000 bricks at 300 Ugandan Shillings (UGX) each to a builder – a total invoice of 60m UGX. 
  • I confirm satisfactory receipt of the goods and advance 60% of the invoice value (in this case all the manufacturers cost) to the brick-maker who receives 36m UGX. 
  • I chase payment of the invoice which is made 45 days after the invoice is sent. 
  • I deduct the processing fee of 1.2m UGX and the interest fee on the 36m UGX  advance (calculated monthly) of a further 720k UGX and send my client the balance of 22.08m UGX. 

The buyer got their bricks; the manufacturer got all his costs covered immediately and did not have to chase for payment; and I made 1.92m UGX on a loan of 36m in 45 days (a return of just over 5%). Annualised this would make me more than 43% per annum – and I pick the products I lend on, the people I lend to, and the clients I collect from. 

Most importantly the relatively low cost of credit and the immediacy of working capital make this a brilliant option for my brick-maker. What´s not to like??!! 

Jon Pedley is Chief Operating Officer, Investment Owl.  For more information on this or anything financial contact [email protected]  

Also Read: Virus hurts South Africa business confidence drops the lowest level

Tags: Doing business in africaFinancial Inclusion in Africainvesting in AfricaLending in Africapremium

STATE OF ECONOMY - GET THE REPORT

ASSESSING EAST AFRICA

Loading...

Opinion

Opinions by contributors are views of respected thought leaders in the respective industries they operate in. The Exchange is a close partner with each of the various opinion contributors.

Related Posts

Liquid Intelligent Technologies completes acquisition of Telrad www.theexchange.africa
Money Deals

Liquid Intelligent Technologies completes acquisition of Telrad

August 17, 2022
Money Deals

Jubilee to get US$2.3m from Mauritius unit stake sale

August 17, 2022
Senditoo's partnership with Access Forex gives clients access to 200 payout points in Zimbabwe. Takwana Tyaranini (Left) and Shingai Koti, Chief Marketing Officer at Access Finance International Group (Right).www.theexchange.africa
Money Deals

Senditoo and Access Forex partner for hassle-free international transfers

August 16, 2022
Next Post
Azania Bank's employee serving customer- The Exchange

Why Customer Experience will Determine Company Success in 2020 and beyond

Post Covid 19 era in the insurance industry

Remote working not for the insurance industry

EAC

Congo now wants a share of the East African Community EAC pie!




This months edition

Features

The leaders of the BRICS nations meet at the group’s summit in Osaka in June 2019. Concerns are India might pull out of the group over tensions with China. (Photo/ Reuters)
Countries

What does Russia’s invasion of Ukraine mean for Southern Africa?

by Albert Nangara
August 3, 2022
0

When the United Nations General Assembly voted overwhelmingly on March 2 to condemn Russia’s invasion of Ukraine, African countries accounted...

Read more
Logistics and transport startups will play a major role in enabling Africa’s largest free-trade area (Photo/ Quartz Africa)
Industry and Trade

Trends shaping the future of logistics in African markets

by Albert Nangara
August 3, 2022
0

Digitization of logistics and compliance with sustainability policies will shape the future of logistics in African markets. Digitalization involves the...

Read more
Biometric systems are expected to lead the market for airport security systems in growth over the next five years, as the market increases at an 8 per cent CAGR through 2024 (Photo/ Biometric Updates).
Tech & Business

Machine learning, Artificial Intelligence changing Africa’s Airports

by Albert Nangara
August 2, 2022
0

According to Frontiers, AI has been recognized to have a wide potential to reduce human workload or increase human capabilities...

Read more
www.theexchange.africa/
Investing

ESG global mining and the social license

by Laurence Sithole
August 2, 2022
0

In terms of achieving net zero carbon emissions, the largest mining companies in the world have several options – each...

Read more
Some of the group members learning the components of the new briquette making machine. The machine can produce 500 briquettes per day. www.theexchange.africa
Investing

Reusable, organic charcoal: Answer to Africa’s cooking fuel challenges

by Njenga Hakeenah
August 2, 2022
0

United for Green is working to ensure that Africans do not get to these extremes. By empowering women, the plan...

Read more

News

Banking
Industry & Trade
Investing
Money Deals
Regional Markets
Tech & Biz
Opinion

Countries

Kenya
Tanzania
Uganda
Burundi
Rwanda
Southern Africa
Ethiopia

More

My Account
Contact us
Advertise
About us
Help Center

Subscribers Center

E-paper
Premium Stories
Education Rates
Corporate Subscriptions
Weekely Newsletter

  • My account
  • About us
  • Advertise
  • Contact
  • Privacy Policy
  • Refund Policy – The Exchange
  • Sitemap

No Result
View All Result
  • Home
  • Banking
  • Industry & Trade
  • Investing
  • Money Deals
  • Regional Markets
  • Tech & Biz
  • Countries
  • Opinion
  • Login
  • Sign Up
  • Cart

© 2021 The Exchange - Powered by MediapixManaged by Supported by Digihandler,

Welcome Back!

Login to your account below

Forgotten Password? Sign Up

Create New Account!

Fill the forms below to register

All fields are required. Log In

Retrieve your password

Please enter your username or email address to reset your password.

Log In