Senate Moves To Legalise Factoring Assignments And Receivable Financing

The Senate on Thursday passed for second reading, a bill sponsored by *Senator Mukhail Adetokunbo Abiru, FCA (Lagos East)*, titled, “The Factoring, Assignments and Receivables Financing Bill, 2024”, which seeks to create legal framework for protection of interests of creditors and debtors in order to promote the availability of capital and credit, and to facilitate domestic and international trade and for related matters.

Senator Abiru, who is the Chairman, Senate Committee on Banking, Insurance and other Financial Institutions, in his lead debate explained that the bill seeks to create an avenue where interest of contractual rights to payment of a monetary sum by a debtor is transferred by agreement to a third party called the factor.

Abiru said, “It is a service involving financial transaction receivables (i.e invoices) to a third party called the factor, with the factor assuming full credit and collection of responsibilities.”

According to him, the bill would assist SMEs to get funding from banks and financial institutions, for supply orders already obtained from big corporations on trust.

Speaking with journalists after the bill was passed, Abiru said “it was necessary to have a formal structure whereby  we can help most of our micro, small and medium enterprises.”

He said, “What happens is that small businesses do a lot of business transactions with the big companies. The big companies, because of their strength, will buy goods or trade from  the smaller companies typically on a credit basis and they won’t pay cash because of the financial muzzle they have.

Abiru said, “This new means of financing is referred to as debt factoring. Debt factoring is, simply put, the sale of receivables (debt) by one entity (the “Seller”) due from another party (the “Debtor”) to a third party (related or unrelated) (known as the “Factor” or “Purchaser”) at a discounted price for immediate cash.  

“Factoring is recognised as “a type of supplier financing in which firms sell their credit-worthy accounts receivable at a discount (equal to interest plus service fees) and receive immediate cash”. 

“Basically, it is the practice whereby a company, having supplied goods to a buyer, then goes ahead to “sell” the invoice to a third party who assumes the responsibility of collecting the debt owed to the supplier by the buyer. 

“Factoring, widely used world-wide, is, among other things, a very flexible means of providing working capital finance to a supplier of goods and services. It  has been considered a stable financing alternative by many companies, particularly during the financial crisis over the last five years. 

“Many SME’s that were unable to obtain traditional bank funding were able to under factoring facilities, offered by factoring companies as factors focus principally on the strength of the purchased accounts, and the ability of the account debtors to pay thereon, not, necessarily, on the strength of the client’s own balance sheet.

“Debt factoring has gained global recognition as a financing mechanism because it helps with improving a company’s cash flows and enhanced credit management. It also enables a company to have increased competitiveness in the global marketplace, especially in structured trade finance.  

“In Nigeria, for instance, the Central Bank of Nigeria (CBN) recognises debt factoring as one of the permissible activities of finance companies and the Nigerian Export Promotion Council (NEPC).The CBN has also introduced factoring and forfaiting as instruments for the financing of export and trade to boost the volumes of export from the country. 

“It is for that reason that this bill is being sponsored to create a regulatory framework that would facilitate the development of debt factoring as an alternative means of financing for domestic and international trades in Nigeria and to provide an enabling environment for it to thrive.”

He said the  Bill presents one of the best opportunities to introduce something new and impactful into the regulatory environment for MSMEs in Nigeria. 

Abiru said, “Despite the increasing prominence of factoring globally and in Africa, Nigeria is yet to tap into this financing mechanism. According to the Afreximbank, which is the major promoter of factoring in Africa, the continent accounted for less than 1 percent of global factoring volumes in 2017.

“This would go a long way in closing the trade/MSMEs finance gap in the country. The speedy passage of the Bill with your support will promote a suitable regulatory and legal environment to support the rapid development of factoring services.

Abiru, a renowned economist, accountant and accomplished banker argued further that the bill would also contribute towards integrating Nigeria into the global factoring market and enable it tap into €2.6 trillion global factoring market.