On Thursday, the Senate passed the second reading of a bill that seeks to establish a legal framework governing transactions between large corporations and Micro, Small, and Medium Enterprises (MSMEs).
The proposed legislation, known as the Factoring Assignments and Receivables Financing Bill 2023, aims to enhance transparency, provide certainty, and offer protection for both creditors and debtors in business transactions, ultimately improving access to capital and credit.
The bill, sponsored by Senator Tokunbo Abiru, Chairman of the Senate Committee on Banking, Insurance, and Other Financial Institutions, is designed to support domestic and international trade by providing a structured process for receivables financing.
Senator Abiru explained that the bill introduces a mechanism by which contractual payment rights from a debtor can be transferred to a third party, known as the “factor.”
“Factoring involves a financial transaction where receivables, such as invoices, are transferred to a third party, called the factor, who assumes full responsibility for credit and collection,” said Abiru. He emphasized that this bill would help MSMEs secure timely funding from banks and financial institutions to fulfill supply orders from large corporations.
Following the second reading, Senator Abiru highlighted the importance of creating a formal structure to support MSMEs, which often engage in credit-based transactions with large companies. He noted that large corporations, such as Nestlé and Cadbury, may use their financial strength to delay payments, placing smaller businesses at a disadvantage.
Abiru further elaborated on the concept of debt factoring, describing it as "the sale of receivables 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." This form of supplier financing, he said, allows firms to sell their credit-worthy accounts receivable at a discount in exchange for immediate liquidity.
The Senator also noted that factoring is widely used globally and provides a flexible way for suppliers to access working capital, particularly during financial crises. For MSMEs that struggle to secure traditional bank funding, factoring offers a viable alternative.
“Factoring has been a stable financing option for many companies and remains a vital tool for SMEs, especially in times of economic uncertainty,” Abiru concluded.
The bill's passage represents a significant step toward improving the financial ecosystem for MSMEs in Nigeria, positioning them for growth and enhancing their ability to participate in both local and international trade.
