In nations around the continent, business is booming, and African entrepreneurs are desperately searching for ways to finance their small-business dreams. Governments and nonprofit organizations are striving to aid growing industries to bolster the African economy, but some organizations are eager for funding that doesn’t depend on wealthy foreigners or brand-new regimes. As a result, invoice factoring is rising in popularity around the continent, and more business leaders are turning to the Western practice as a means of increasing their cash and improving their business potential.
What Factoring Is and How It Works
Factoring has been a common business practice for centuries, though it hasn’t always claimed its current name. Essentially, factoring is the selling of unpaid invoices (or accounts receivable) to a third party at a small discount. Some factoring companies will take on the task of collecting the client payments, while others leave that as your responsibility.
Most invoice factoring companies do maintain some stipulations on who can factor and how. For example, factoring companies rarely work with retailers or other consumer-based businesses; instead, only B2Bs or businesses with government clients can sell their invoices. Additionally, most factoring companies require specific invoice terms, such as client payment deadlines between 30 and 90 days. Meanwhile, businesses can choose from a bevy of factoring features, including whether the service is one-time and the sold invoices tightly controlled (called spot factoring) or whether the service is monthly and requires a minimum quantity of invoices to function (called contract factoring).
For the business selling its invoices, the most obvious benefits of this transaction are fast cash, fewer expenses, and virtually no risk for taking on new clients. Therefore, businesses who factor usually claim healthier cash flows, which allow for faster and stronger growth. For factoring companies, the benefits are even more obvious: easy income. For most clients, the process of paying the invoices remains identical; only those clients who become delinquent or are otherwise unwilling to pay have a different experience.
Who Provides Factoring Services
Unlike more common business financing options, factoring is not usually provided by local financial institutions. Instead of looking for factoring opportunities at banks, business leaders must search specifically for factoring companies. Most often, businesses connect with an invoice factoring company online. There, businesses can find information about company policies that make choosing the right factoring company easy.
Factoring companies, like other financial services providers, aren’t always upfront and honest. Business leaders must be careful to perform adequate research before making agreements with any services provider, especially those that potentially take the business’s accounts receivable. Most importantly, leaders should fully understand a factoring company’s fee structure, payment penalties, and customer service before entering an agreement.
Without knowing this information beforehand, businesses can suffer beneath the weight of surprise factoring costs – and worse, they can lose their clients due to improper handling from their factoring company. Fortunately, not all invoice factoring companies are untrustworthy; it just takes finding the right one to bring business success.
What Factoring Can Do for Africa
Small and medium businesses are at the forefront when it comes to pushing forward economic growth everywhere in the world. Unfortunately, African small businesses tend to have less access to capital than small businesses elsewhere, severely impacting their ability to grow and incite positive economic change. Invoice factoring could provide African entrepreneurs the financial boost they need – if only African entrepreneurs knew and accepted factoring as a business practice.
Africa in 2012 only contributed about 1 percent to global factoring activity, and a gigantic 91 percent of that came from South Africa, which already boasted a thriving economy. There remain a number of obstacles impeding the spread of factoring around the continent, including regulatory, legal, and tax barriers in various countries.
However, studies show that the primary reason African business leaders do not engage in factoring is because they are generally unaware of it. It is vital that African nations ease the factoring process and inform businesses of the immense benefits of factoring for the betterment of the continent’s economic health.
Foreign aid is doing much to improve the health and stability of Africa, but the continent desperately needs to construct its own economy to survive and advance. The age-old practice of invoice factoring provides the opportunities African entrepreneurs need to build strong, productive businesses, and the sooner they learn what factoring is and how it works, the better.