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The Senate on Thursday passed, for second reading, a bill seeking to create a legal framework for transactions between large corporations and Micro, Small, and Medium Enterprises.
The proposed legislation, titled the Factoring Assignments and Receivables Financing Bill 2023, aims to promote transparency, certainty, and adequate protection for both creditors and debtors, ultimately enhancing access to capital and credit.
Sponsored by Senator Tokunbo Abiru, Chairman of the Senate Committee on Banking, Insurance, and Other Financial Institutions, the bill is designed to facilitate both domestic and international trade.
According to Abiru, the bill will provide a mechanism whereby contractual rights to payment from a debtor can be transferred to a third party, referred to as the ‘factor’.
“It is a service involving a financial transaction where receivables—such as invoices—are transferred to a third party called the factor, with the factor assuming full credit and collection responsibilities,” Abiru explained.
He emphasised that the bill would help MSMEs secure funding from banks and financial institutions for supply orders received from large corporations.
Speaking with journalists after the bill’s second reading, Abiru stressed the need for a formal structure to support MSMEs in their dealings with large companies.
He said, “Small businesses often transact with large firms like Nestlé, Cadbury, and others on credit terms, as these large companies can leverage their financial strength to delay payments.”
Abiru further elaborated on the concept of debt factoring, describing it as “the sale of receivables (debt) by one entity (the ‘Seller’) due from another party (the ‘Debtor’) to a third party (the ‘Factor’ or ‘Purchaser’) at a discounted price for immediate cash.”
He added, “Factoring is a type of supplier financing where firms sell their credit-worthy accounts receivable at a discount and receive immediate cash.”
This mechanism, he noted, is widely used globally and offers a flexible means of providing working capital to suppliers of goods and services.
“Factoring has been a stable financing alternative for many companies, particularly during financial crises. For SMEs unable to secure traditional bank funding, factoring offers a viable option,” he added.
Abiru pointed out that debt factoring is recognised as a critical tool for improving cash flow and credit management, enhancing a company’s competitiveness in the global market.
In Nigeria, both the Central Bank of Nigeria and the Nigerian Export Promotion Council recognise debt factoring as a permissible financial activity.
The CBN has also introduced factoring as a means to boost export volumes.
“The passage of this bill will create a regulatory framework that facilitates the development of debt factoring as an alternative means of financing for domestic and international trade in Nigeria,” Abiru said.
He further highlighted that despite the global prominence of factoring, Nigeria has yet to fully tap into this financing mechanism.
According to Afreximbank, a major promoter of factoring in Africa, the continent accounted for less than 1% of global factoring volumes in 2017.
“This bill presents a key opportunity to close the trade and MSME finance gap in Nigeria.
“The speedy passage of this bill will support the rapid development of factoring services and help integrate Nigeria into the €2.6 trillion global factoring market,” Abiru concluded.
