Factoring Agreement (Kenya)

A Factoring Agreement in Kenya sets out the rights, duties and consideration binding the parties to it.

The Law of Contract Act Cap. 23, which applies English common law principles as received into Kenyan law, governs the contractual validity of the Factoring Agreement. The assignment of receivables requires the consent requirements and written notice provisions established by Section 66 of the Transfer of Property Act as adopted in Kenya — the debtor must be notified of the assignment for it to be effective against the debtor, and the factor must give written notice to each debtor directing payment to the factor's account.

The Movable Property Security Rights Act No. 13 of 2017 (MPSRA), administered by the Collateral Registry managed by the Ministry of Lands and Physical Planning, fundamentally changed the legal framework for security interests in movable property in Kenya, including receivables. Under the MPSRA, an assignment of receivables for the purpose of securing an obligation — as in invoice discounting — is treated as a security interest and must be registered with the Collateral Registry to be effective against third parties. A true sale of receivables under a factoring arrangement, where the factor takes on the credit risk, may fall outside the MPSRA security interest framework, but registration is prudent practice to protect priority.

The Banking Act Cap. 488 and the Central Bank of Kenya Act Cap. 491 regulate entities that carry on banking business, which includes receiving deposits and advancing credit. Factoring companies that advance funds against receivables may be required to hold a licence from the Central Bank of Kenya (CBK) if their activities constitute the business of financial services under the Microfinance Act No. 19 of 2006 or the CBK Act. Several commercial banks and licensed financial institutions operate factoring desks or invoice discounting facilities in Kenya as part of their trade finance product suites.

The Value Added Tax Act No. 35 of 2013 (VAT Act) is relevant because the receivables being factored typically represent VAT-inclusive invoices. The factor takes an assignment of the full invoice amount including VAT but does not supply goods or services to the debtor — consequently, VAT on the original supply remains the client's liability, and the factor's discount fee (factoring charge) may itself be subject to VAT as a financial service supply in certain configurations.

The Tax Procedures Act No. 29 of 2015, administered by the Kenya Revenue Authority (KRA), requires both parties to maintain records of the factoring transactions, the receivables assigned, and the payments collected, for a minimum of five years from the date of the relevant tax return.

A Factoring Agreement in Kenya is required whenever a business needs to convert its outstanding trade receivables into immediate working capital by selling those receivables to a factor, rather than waiting for customers to pay on standard credit terms.

A Factoring Agreement is needed when a Kenyan manufacturer or wholesaler sells goods to large retail chains or supermarkets on 60 to 90-day credit terms and faces a working capital gap — it must pay suppliers, wages, and overheads now but will not receive customer payment for two to three months. By factoring the supermarket invoices, the manufacturer receives 70% to 85% of the invoice value within 24 to 48 hours of invoice verification, enabling continuous production.

A Factoring Agreement is required when a company supplying goods or services to the Government of Kenya — including ministries, state corporations, counties, or constitutional commissions — on purchase orders experiences prolonged payment delays. Government suppliers in Kenya commonly wait 90 to 180 days for settlement of validated invoices. A Factoring Agreement enables the supplier to receive immediate funding against the government purchase order or validated invoice, improving cash flow.

A Factoring Agreement is needed when an export-oriented Kenyan business — such as a horticulture exporter, a tea producer, or a garment manufacturer in the Export Processing Zone (EPZ) administered by the Export Processing Zones Authority (EPZA) — needs to fund the production cycle between export shipment and receipt of payment from the foreign buyer. Export factoring, sometimes structured under the rules of Factors Chain International (FCI), provides advance funding and credit risk cover on the foreign receivable.

A Factoring Agreement is required when a construction company or engineering contractor in Kenya that has completed milestone work under a building contract has raised certified payment certificates against the main contractor or client but is awaiting payment. Receivables factoring against certified payment certificates provides immediate liquidity to pay subcontractors and suppliers.

A Factoring Agreement is needed when a professional services firm — an accounting practice, a law firm, or a management consultancy — has outstanding fee invoices from corporate clients on 30 to 60-day terms and requires working capital to fund payroll and operational costs. Though professional service receivables are more complex to factor (due to dispute risk), specialist factors operating in Kenya offer such facilities.

A Kenya Factoring Agreement under the Law of Contract Act Cap. 23 and the Movable Property Security Rights Act No. 13 of 2017 must contain the following essential elements to be commercially effective and legally enforceable.

Parties and Recitals: Full legal names and addresses of the client (the business selling receivables), the factor (the financial institution or factoring company purchasing receivables), including Business Registration Service (BRS) numbers and KRA PINs. Where the factor is a licensed financial institution, its Central Bank of Kenya (CBK) licence number or Microfinance Act licence reference should be stated.

Definition of Eligible Receivables: Precise definition of which receivables are eligible for purchase — for example, trade invoices arising from the sale of goods or provision of services in Kenya by the client to approved debtors, with payment due within a specified maximum term (typically 90 or 120 days), free from dispute, set-off, or counterclaim, and evidenced by a VAT-compliant Electronic Tax Invoice (ETI).

Approved Debtors and Credit Limits: The process by which the factor approves or declines specific debtors, the credit limit assigned to each approved debtor, and the consequences of a debtor exceeding its credit limit. The factor retains the right to withdraw approval for a debtor at any time with notice, and the client must cease selling to unapproved debtors on credit.

Assignment Mechanism and Notice: The procedure for assigning receivables — submission of invoice schedules, assignment notices to debtors, and electronic upload to the factor's platform. Written notice of assignment must be served on each debtor directing payment to the factor's designated collection account, as required under Kenyan common law assignment principles derived from the Law of Contract Act Cap. 23.

Advance Rate and Funding: The percentage of the face value of eligible receivables that the factor will advance to the client upon verification (typically 70% to 85%). The advance is paid into the client's nominated bank account, and the balance (the reserve) less the factor's fees is remitted upon collection from the debtor.

Recourse and Non-Recourse: Whether the arrangement is with recourse (the client bears the credit risk of debtor non-payment and must repurchase uncollected receivables after a specified period, usually 90 days from due date) or without recourse (the factor bears the credit risk and assumes the risk of debtor default). Non-recourse factoring in Kenya typically commands a higher discount rate.

Factoring Charges and Fees: The discount rate or factoring fee expressed as a percentage of the invoice face value per month outstanding (e.g. 2% to 4% per month), any service fee for ledger management, collection costs, and the interest rate on outstanding advances. All fees should comply with the Consumer Protection Act No. 46 of 2012 disclosure requirements where applicable.

Collection and Enforcement: The factor's rights to collect from debtors, to issue demand letters, and to commence legal proceedings under the Civil Procedure Act Cap. 21 before the Magistrates Court of Kenya or the High Court of Kenya against debtors who fail to pay. The client must cooperate with the factor's collection efforts and must not compromise debtor claims without the factor's written consent.

Registration with Collateral Registry: Where the Factoring Agreement constitutes a security interest under the Movable Property Security Rights Act No. 13 of 2017, the factor must register the security interest with the Collateral Registry administered by the Ministry of Lands and Physical Planning to perfect its priority over the assigned receivables against the client's other creditors and insolvency trustee.

Termination: The circumstances in which either party may terminate — material breach, insolvency of either party under the Insolvency Act No. 18 of 2015, or expiry of the facility term — and the consequences of termination for receivables in the pipeline and for outstanding advances. The forms-legal.com Factoring Agreement template for Kenya includes all mandatory commercial terms required under the Law of Contract Act Cap. 23 and the MPSRA, with debtor notification letters included as schedules. Under Kenya law, Section 3 of the Companies Act 2015 (No. 17 of 2015) and Section 15 of the Employment Act 2007 (No. 11 of 2007) govern the core requirements for this type of document.

Under the Central Bank of Kenya Act (Cap. 491), the Central Bank of Kenya (CBK) regulates banking. The Capital Markets Authority (CMA) regulates securities under the Capital Markets Act (Cap. 485A). Section 84 of the Bills of Exchange Act (Cap. 27) governs promissory notes. The Kenya Revenue Authority (KRA) administers tax obligations. The Microfinance Act No. 19 of 2006 regulates microfinance institutions. The Hire Purchase Act (Cap. 507) governs credit sale agreements.