Factoring as an international trade finance product : making a case for the enactment of a factoring act in Zambia

Abstract

It is axiomatic that small and medium-sized enterprises (SMEs) are the lifeblood of most economies across the globe. However, access to finance continues to elude SMEs. This problem has been exacerbated by the global financial crisis of 2008 which triggered the introduction of stricter financial regulation resulting in a drastic slow-down in SME financing.1 Worse still, SMEs often supply their goods and services on trade credit terms and typically experience late payment from their debtors who often have greater bargaining power. This adversely impacts their liquidity and restricts their growth.2 As bank lending often requires collaterals and guarantees, the odds weigh disproportionately against SMEs. These small businesses find it difficult to access bank loans because their assets may already be a subject of encumbrance under an existing facility or they simply lack adequate assets to satisfy lenders’ requirements. Factoring, as a financial service premised on the sale of accounts receivable to a third-party financier, is a viable option to surmount this cash flow problem. It provides immediate cash to the business in consideration for the accounts receivable often purchased at a discount and takes into consideration other charges as well. Although factoring is a trade finance product that has been used in modern commerce for several decades, this financial tool is gaining unprecedented impetus across the globe. This is partly attributable to the development of more sophisticated legal structures3 developed by global institutions and adapted by national legislatures. Africa’s participation in the factoring industry remains grossly stunted. Some reasons for this are the lack of an appropriate legal structure and lack of awareness of the financial tool in most African jurisdictions. Afreximbank under the auspices of FCI developed a model law on factoring to serve as a prototype for African states to model and enact at domestic level. This paper makes an extensive assessment of the existing legal framework and advocates that Zambia draws important lessons from the Afreximbank Model Law and other jurisdictions to enact its own Factoring Act to ensure that its small businesses can have enhanced access to financing through factoring and can thus operate at their cutting edge.