factoring
Factoring is when a business sells its unpaid invoices to a company for quick cash, instead of waiting weeks or months for customers to pay.
In plain English
Here is the part that sounds backwards. A business owner can be sitting on ₦10,000,000 worth of confirmed sales and still not have enough cash to pay salaries this month. The sales are real, the customers are trustworthy, the invoices are signed. The only problem is that the money is not due for another sixty or ninety days, and rent does not wait sixty days.
Factoring solves this by bringing in a third party, the factor, who buys the invoice off you at a discount and pays you almost immediately. Say you supply cement to a construction firm in Lagos and you have invoiced them ₦2,000,000, payable in ninety days. Instead of waiting, you sell that invoice to a factoring company. They pay you ₦1,850,000 now, and when the construction firm eventually settles the full ₦2,000,000, the factoring company keeps that ₦150,000 as their fee.
You have given up some profit, yes, but you have gained something more valuable in that moment, which is oxygen for your business. You can pay your workers, buy more cement, keep the lights on. The construction firm never even needs to know the invoice changed hands, in most arrangements they still just pay as agreed, only now to a different account.
This is common in manufacturing, logistics, and export businesses across Nigeria, where big buyers love long payment terms but small suppliers cannot survive on paper promises. In the United Kingdom, factoring is a standard tool for small manufacturers and staffing agencies who invoice large corporate clients that pay on sixty or ninety day terms as a matter of policy.
For someone abroad supporting a family business back home, understanding factoring explains a strange but useful truth, that a business can be profitable on paper and still need this kind of bridge to survive the gap between selling and getting paid.
A tailor in Kano supplies uniforms worth ₦5,000,000 to a school, payable in sixty days. She sells the invoice to a factor for ₦4,600,000 cash today, and the factor collects the full ₦5,000,000 from the school when it falls due.
Questions people ask
Is factoring the same as taking a loan?
No. A loan adds debt to your books and you must repay it regardless of what happens with your customers. Factoring is a sale, you hand over the right to collect an invoice and you owe nothing back, the risk of collection often shifts to the factor depending on the agreement.
Why would a factoring company accept a lower amount for the invoice?
That gap between what they pay you and what they eventually collect is their profit and their reward for waiting the sixty or ninety days and taking on the collection work, similar to how a moneylender charges interest for the use of their cash today.
Which Nigerian businesses use factoring the most?
Suppliers to large companies and government agencies, especially in manufacturing, construction supply, and logistics, where big clients insist on long payment terms but the small supplier still has immediate costs to cover.
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