Obtaining conventional bank loans is still proving to be problematic for both foreign and local companies importing or exporting goods into or out of Africa. To combat these issues, receivables financing has emerged as a formidable alternative financing tool.
Receivables financing involves the sale by companies of receivables at a discount, in exchange for a cash payment. Factoring and invoice discounting are the most common types of receivables financing. Due to an array of market conditions, factoring is not experiencing the same increase in popularity in Africa as invoice discounting.
Invoice discounting can take various forms: (i) receivables can be purchased on an undisclosed basis or a disclosed basis and (ii) receivables can be purchased on a non-recourse or a limited recourse basis. The structure of an invoice discounting transaction depends largely on the negotiating strength of the purchaser and the seller, the perceived credit worthiness of the debtors and the law(s) applicable to the invoice discounting.
Invoice discounting is rising steadily in South Africa where local banks or branches of international banks in South Africa are offering this financing tool to South African companies. Receivables financing as a local financing tool in other African jurisdictions is not as widespread, but some of the bigger African banks (specifically South African, Nigerian and Ghanaian banks) as well as international banks with a strong presence in Africa, are prepared to undertake receivables financing on a pan-African basis where the seller is an international company providing goods to companies located in various African jurisdictions.
The main benefit of invoice discounting for local sellers is that it allows them a steadier control over cash flow. This regular cash flow means that sellers can negotiate more attractive settlement terms and bulk purchase discounts with suppliers. For international sellers, it alleviates some of the non-payment risk which ultimately allows them greater exposure to, and to do more business in, Africa.
Invoice discounting is mainly aimed at sellers with strong financial management systems, so local sellers entering into these transactions tend to be sophisticated and exporting goods out of Africa rather than supplying goods locally. Small to medium sized companies supplying goods locally tend not to have the necessary financial management systems in place and may also be dealing with large local buyers (such as government, para-statals and mining companies) that often place restrictions on the assignment of receivables.
International sellers, in particular, need to take into account the multitude of laws applicable to invoice discounting (law of the discounting agreement/assignment, law of the commercial contract, law of the seller, law of the debtors) as each applicable law will have its various requirements and formalities. They also need to consider tax implications (withholding taxes, stamp and registration duties may be payable). These hidden costs in terms of time and money can greatly affect the viability and/ or profitability of any deal.
Purchasers of receivables undertaking invoice discounting in Africa need to be aware that the majority of countries in Africa do not have a central registry where a transfer of receivables can be registered; there may be restrictions on the transfer of receivables in the underlying commercial contracts; the value of the original receivables can be diluted due to credit notes, trade discounts, warranties and advertising allowances; and fraud can be a risk.
Importantly, none of these issues are confined to Africa only and none of these issues are insurmountable. There are legal, commercial and operational ways to protect against them to make sure receivables financing continues to grow in Africa.