A research team working under the auspices of the Bank of Namibia presented a paper this week investigating the options for small businesses presented by factoring and leasing, to improve their access to working capital.
In a draft paper titled: "Enhancing the role of factoring and leasing companies in providing working capital to Small and Medium Enterprises (SMEs) in Namibia", authors Gerson Kadhikwa, Florette Nakusera and Postrick Mushendami argue that typical SME businesses can improve their cash situations by considering such options as factoring and leasing.
Factoring is generally viewed as a form of secondary financing by using a so-called debtors book, or accounts receivable, as collateral, either for an overdraft arrangement, or to receive an advance from a factoring agent. It is widely used by start-up businesses in sophisticated markets in an effort to reduce the intervals of the debtors aging cycle but it is also considered a relatively expensive form of financing. It can cost the young company anything up to 30% in revenues.
Leasing is a form of ownership without being the actual owner. Leasing is an accepted way of financing expensive capital equipment. It reduces the drag on the income statement but it does not add to the balance sheet. Leasing is widely used by banks to help clients avoid fixed capital investments at a time when they cannot afford these from profits, but still giving the client control over the equipment for improved production, faster growth, more efficient market penetration and eventually, bigger profits.
According to the authors their paper adopted a desk review and field surveys to assess the demand and supply of leasing and factoring in the country. The survey and desk review were supported by case studies of South Africa, Mexico and Burkina Faso.
The results of the field survey suggest that there exist a niche market for both leasing and factoring in Namibia, (the supplier’s perspective). The clients are SMEs, start-up companies as well as large businesses. The majority of SMEs were in favour of factoring as a viable means of accessing working capital. They felt it would be ideal particularly for factoring services to be offered by the DBN.
It was however, established that, factoring is not well known and is less developed in Namibia. There is only one factoring company operating in Namibia. Moreover, one commercial bank offers factoring, but not in the strict definition of the term. Some of the commercial banks expressed the view that factoring is in general a risky and expensive method of providing working capital to SMEs, therefore they would not consider offering it. Others however, argued that if found feasible, they would consider offering it to potential clients.
Furthermore, it was cited that for factoring services to take off effectively, there is a need to tackle a number of crucial factors. These factors include a proper and enforceable legal framework, increased awareness, simplified factoring services, and skills development. Another issue raised, was the need for capital to fund the optimal take-off of the factoring business. Factoring is a very useful working capital and cash-flow management facility that will provide market participants with more options to access financial services. Moreover, factoring minimises a company’s debtors department and enables businesses to negotiate better rates with creditors.