What factoring means
Factoring turns an invoice into cash before the customer pays it.
You have supplied the goods or the service. The customer owes you five million naira in sixty days. You need the money now. A factor buys that receivable, advances you most of the value immediately, collects from the customer when the invoice falls due, and keeps a fee.
It is not a loan in the classic sense. You are selling an asset, the debt, rather than borrowing against it, although the commercial effect is similar and the documentation often looks like a financing agreement.
Two structures dominate. Recourse factoring leaves the credit risk with you: if the customer does not pay, you must buy the debt back or repay the advance. Non recourse factoring transfers that risk to the factor, and costs more because of it.
How it is used
Factoring suits businesses that are profitable on paper and short of cash, which describes a great many Nigerian suppliers.
A distributor supplying supermarkets on sixty day terms. A contractor waiting on a corporate client's payment cycle. A manufacturer whose customers pay in ninety days while its own suppliers want thirty. In each case the business is not unprofitable, it is starved of working capital by the gap between paying out and being paid.
The practical mechanics matter. The factor assesses your customers rather than only you, because it is their creditworthiness that determines whether the invoice will be paid. Notice is normally given to the customer that the debt has been assigned and must be paid to the factor, which is what makes the assignment effective against them.
A facility usually advances a percentage of the invoice value up front, commonly a large majority, with the balance released on collection less the fee.
Cost is expressed as a discount or a fee rather than an interest rate, so comparing it with a loan requires converting it to an annualised figure.
Key features
- Converts unpaid invoices into immediate cash at a discount
- The factor usually advances a large percentage up front
- Recourse factoring leaves credit risk with the supplier; non recourse transfers it
- Notice to the customer makes the assignment effective against them
- The factor assesses your customers, not only your business
- Priced as a fee or discount rather than as an interest rate
How this works in Nigeria
Receivables financing has become more workable in Nigeria since the Secured Transactions in Movable Assets Act 2017.
Before it, Nigerian lending was dominated by land security, and a business whose main asset was a book of receivables was effectively unbankable. The Act established the National Collateral Registry, where interests in movable assets including receivables can be registered, giving priority and public notice. That gave financiers a route to secure against invoices.
The assignment point still matters. To be effective against the customer, the assignment should be notified to them in writing, so they know to pay the factor rather than the supplier. Without notice, a customer who pays the original supplier in good faith may discharge the debt, leaving the factor with a claim against the supplier instead.
The practical Nigerian obstacle is customer quality. Factors will advance against invoices owed by large, creditworthy buyers and are far less interested in receivables from small businesses with no payment record. That is exactly the reverse of who needs the cash most.
Cost is the other consideration. Factoring is expensive relative to a bank facility, and it is worth doing where the alternative is turning away orders, not as a permanent way of funding a business.
Factoring vs invoice discounting vs an overdraft
Three ways to fund the gap between supplying and being paid.
Factoring sells the invoice. The factor takes over collection, the customer is notified and pays the factor, and the supplier is relieved of chasing. It is visible to your customer, which some businesses dislike.
Invoice discounting borrows against the invoice. You keep collecting, the customer often does not know a financier is involved, and you repay from the proceeds. It is confidential, and financiers offer it to businesses with stronger credit controls.
An overdraft is a general facility on your account, repayable on demand, not tied to any particular invoice. It is flexible and usually cheaper, and it depends on the bank's view of your business as a whole rather than of your customers.
A growing supplier with strong customers and weak cash flow usually starts with an overdraft, moves to discounting as the receivables book grows, and uses factoring where collection is itself the problem.
Limits and risks
It is expensive. Fees expressed as a small percentage of invoice value translate into a high annualised cost, and a business that factors everything permanently is giving away a meaningful share of its margin.
It also depends on your customers. A supplier whose buyers are small or unreliable will struggle to obtain a facility at all, or will only obtain recourse terms that leave the risk where it started.
Customer relationships can suffer. Notification tells your buyer you are financing receivables, which some read as a sign of distress, and a factor chasing your customer chases in its own style rather than yours.
And recourse factoring is not risk transfer. If the customer does not pay, the supplier repays, so the facility solves timing rather than credit risk.
Worth knowing
Convert the fee into an annualised cost before you sign. A charge of two and a half percent on a thirty day invoice is not two and a half percent a year, and Nigerian suppliers who compare it to a bank rate without doing that arithmetic are usually surprised by what factoring actually costs.
Questions people ask
What is factoring?
Selling your unpaid invoices to a financier for immediate cash at a discount. The factor advances most of the value, collects from your customer when the invoice falls due, and keeps a fee.
What is the difference between factoring and invoice discounting?
In factoring the financier takes over collection and your customer is notified. In invoice discounting you keep collecting and the arrangement is usually confidential, which financiers offer to businesses with stronger credit controls.
What is recourse factoring?
Factoring where the credit risk stays with you. If the customer does not pay, you buy the debt back or repay the advance. Non recourse factoring transfers that risk to the factor and costs more.
Does my customer have to be told?
For a legal assignment to be effective against the customer, they should be notified in writing to pay the factor. Without notice, a customer paying the original supplier in good faith may discharge the debt.
Can Nigerian businesses use receivables as security?
Yes. The Secured Transactions in Movable Assets Act 2017 established the National Collateral Registry, where interests in receivables and other movable assets can be registered, which made receivables financing workable.
Is factoring cheaper than a bank loan?
Usually not. Fees expressed as a percentage of invoice value translate into a high annualised cost. It is worth using where the alternative is turning away orders, rather than as permanent funding.