Invoice discounting and factoring: banks or fintech platforms

Slow-paying customers are a familiar cash-flow problem for growing businesses in Kenya and across East Africa. You deliver, invoice and then wait, while salaries, suppliers and taxes fall due. Invoice finance closes part of that gap by letting a financier advance money against invoices before the buyer pays.

There are two main forms and two main kinds of provider. Choosing well starts with understanding how each one works.

How each one works

In invoice discounting, the financier lends against your unpaid invoices. You keep control of your sales ledger, collect from customers as usual and repay the financier as the money comes in. Customers often do not know a financier is involved, although the agreement may require payments to go into an account the financier controls.

In factoring, you sell or assign the invoices to the financier, known as the factor. The factor usually takes over collection, and your buyers are told to pay it directly. Factoring suits businesses that want help with collections, and it means your customers will know about the arrangement.

Either way, the financier advances only part of each invoice's value. The remainder comes to you when the buyer pays, less the financier's charges. In Kenya, a financier that takes security over your receivables, or buys them outright, can register its interest at the Collateral Registry under the Movable Property Security Rights Act, 2017. Our brief on using movable assets as collateral explains what that registration does.

Some providers also offer LPO financing, which funds a purchase order before you deliver. That carries a different risk, because there is no invoice yet, and it is assessed differently.

Recourse and non-recourse

Under a recourse arrangement, the risk of non-payment comes back to you. If the buyer does not pay, you repay the advance or replace the invoice with another. Many SME facilities work this way, because the financier relies on both you and your buyer.

Under non-recourse terms, the financier takes on the risk that an approved buyer cannot pay, often supported by credit insurance. It costs more and comes with limits. Protection usually applies only to buyers the financier has approved, up to a set limit for each, and only to insolvency or a defined failure to pay. Disputes are normally excluded. If the buyer refuses to pay because it says the goods were late or faulty, the invoice is likely to come back to you.

Banks and fintech platforms

Banks usually review the whole business, take wider security and set a facility limit, often alongside an overdraft or trade finance line. Setting up takes longer, but the facility sits with the rest of your banking and the terms tend to be more stable.

Fintech platforms usually focus on the invoice and the buyer. They work online, often decide faster, need less paperwork and may fund single invoices. Limits can be smaller and terms shorter, and the total cost can be higher once every fee is counted.

Before you sign with any provider, check who licenses and supervises it, how its charges add up over the full payment period, and what happens to your invoices and data if it stops operating. Make sure any sharing of customer data is consistent with the Data Protection Act, 2019.

Which buyers and invoices qualify

In invoice finance, your buyer's ability to pay matters as much as your own credit. Invoices to large corporates, established distributors and other buyers with a clear payment record are the easiest to finance. Public-sector invoices can qualify, but financiers look closely at approval processes and payment timing. The invoice itself also needs to be clean:

• For goods already delivered or services completed and accepted.
• Backed by a purchase order or contract, a delivery note and signed acceptance.
• Undisputed, within the financier's limit on invoice age and not financed elsewhere.
• Payable to your business, with no right for the buyer to set off other claims.
• Correctly issued for tax, including through KRA's eTIMS where it applies to you.

Records you will need

Your records decide how quickly a provider can reach a decision and how much it will advance. Expect to provide an aged debtors listing that agrees with your accounts, and copies of the invoices with their purchase orders, delivery notes and acceptance. You will also need your main customer contracts, recent management and audited accounts, bank statements showing customer receipts, and the usual company and KYC documents with a current KRA tax compliance certificate.

A history of credit notes and disputes by customer helps too. It shows the financier how clean your invoices really are.

Risks to manage

• Dependence. Invoice finance can become permanent. Use it to bridge payment terms, and keep cash forecasting in place.
• Customer relationships. Factoring puts a third party in contact with your buyers. Choose a provider whose collection approach you are comfortable with.
• Contract restrictions. Some customer contracts limit the assignment of invoices. Check before you offer them.
• Concentration. Financiers limit their exposure to any one buyer, so invoices to your largest customer may not all be fundable.
• Existing security. Another lender may already hold security over your receivables. Read your current facility terms and search the Collateral Registry first.
• Double financing. Offering the same invoice to two financiers is a serious breach and can amount to fraud.

How we help

Epiidosis Africa helps SMEs decide whether invoice finance fits and which route suits their buyers. We review your debtor book and invoicing, prepare the records a financier will ask for, compare bank and fintech options with you and introduce you to independent licensed banks and financiers. Our research practice can profile key buyers, and our insurance and risk consulting practice reviews credit insurance where a non-recourse facility relies on it.

We do not lend or buy invoices, and we can't promise approval. The decision rests with the bank or financier.