What Are Factoring Agreements?
Factoring agreements involve purchasing a company's accounts receivable (invoices) at a discount, providing immediate cash flow to the business. Investors advance funds against verified invoices and collect payment directly from the company's customers.
In Ghana's business environment, factoring helps SMEs manage cash flow gaps while offering investors short-term, secured returns.
How Factoring Works
Invoice Verification
Company submits invoices from creditworthy customers
Funding Advance
Investor advances 70-90% of invoice value immediately
Collection
Customer pays investor directly upon invoice due date
Final Settlement
Investor pays remaining balance minus factoring fee
How You Earn Returns
Factoring Fees
Discount on invoice value representing your return.
Volume Based
Returns scale with the volume of invoices processed.
Example Return Calculation
You purchase a GHS 100,000 invoice at 85% advance rate (GHS 85,000 to business). When customer pays the full GHS 100,000, you keep GHS 95,000 (5% factoring fee) and return GHS 5,000 to the business. Your return: GHS 10,000 on GHS 85,000 advance in 60 days.
Key Features
Short Duration
Typically 30-90 day investment periods
Customer Credit Risk
Relies on creditworthiness of invoice payers
No Business Risk
Returns not dependent on business performance
Diversification
Can fund multiple businesses and customers
Risks to Consider
Customer Default
Invoice payer may fail to pay on time or at all.
Fraud Risk
Invoices may be fraudulent or disputed.
Concentration Risk
Overexposure to single customer or industry.