A supply side view of factoring as a financing method for SMEs in Kenya
The trade receivables of a typical SME constitute 21%-35% of its assets. Trade receivables provide an opportune alternative from the more traditional borrowing methods that SMEs use to obtain financing. That alternative is factoring. Factoring is a financial service enabling enterprises to sell their accounts receivable to a factoring company in exchange for cash. This study explores the supply side of factoring by banks in Kenya by looking at the profiles of enterprises receiving factoring services and the criteria that banks consider in making the decision to factor receivables. The study establishes that only about a third of banks in Kenya are offering factoring services. The study also finds that factoring services are provided exclusively to SMEs. Using correlation, the study also determines that in arriving at the decision to factor accounts receivable, banks in Kenya consider the creditworthiness of the SME’s accounts receivable. Factoring as a financing method draws its security from the receivables of the enterprise and not the financial health of the enterprise itself. Given the growth of factoring in the world, Kenya through its financial intermediaries, government and other agents must exploit the opportunity that factoring provides to drive the rapid growth of SMEs.