UAE Factoring Law: What SMBs Must Know
The UAE Factoring Law (Federal Decree-Law No. 16 of 2021) has transformed how small and medium businesses (SMBs) manage cash flow. By legally recognizing invoice financing, the law allows businesses to convert unpaid invoices into near-immediate funding, improving liquidity without taking on new debt.
Key highlights include:
- Simplified Process: Assigning receivables now requires only a written agreement, making it faster and less complicated.
- Legal Protection: The law ensures receivables transfers are enforceable, reducing disputes and boosting confidence for financiers.
- Flexibility: Businesses can choose between notified (customers pay financiers directly) and non-notified (customers remain unaware) factoring methods.
- Improved Access to Funds: Qualified SMBs can typically access up to 95% of approved invoice value within 1–2 business days through licensed financing providers, helping maintain operational liquidity.
This law aligns with global standards and addresses long-standing cash flow challenges for UAE businesses. With digital platforms simplifying documentation and receivables management, SMBs now have a practical, legally supported way to strengthen financial control.
Main Parts of the UAE Factoring Law
Federal Decree-Law No. 16 of 2021 introduces a structured framework for businesses to legally transfer receivables and gain quicker access to financing. It resolves earlier uncertainty around invoice assignments and strengthens legal protection for all parties.
1. Legal Transfer of Receivables
The law confirms that businesses can assign both current and future receivables to financiers, allowing unpaid invoices to be converted into working capital. Under Article 3, a written agreement between the business (assignor) and the financier (assignee) is sufficient for the transfer to take legal effect — no complicated registrations or long approvals required.
Transferred receivables retain their original legal status, meaning the financier holds the same rights to collect payment as the business. This clarity reduces enforcement risk and increases lender confidence.
For SMBs, the process is now straightforward and enforceable under UAE law, making receivables-based financing a more secure option.
2. Rights and Duties of All Parties
The law clearly defines the roles of the assignor (business), assignee (financier), and debtor (customer):
- Assignor (Business): Must provide accurate information about assigned receivables and notify financiers of any issues that could affect payment. The business guarantees the validity of the receivables but not the debtor’s payment — reducing its risk exposure.
- Assignee (Financier): Gains the right to collect payments directly if needed and must manage collections responsibly and confidentially, particularly in non-notified agreements.
- Debtor (Customer): Continues to pay under the original terms. Once notified, payments go to the financier; before notification, payments to the business remain valid.
This structure limits disputes and preserves commercial trust among all parties.
3. Notified vs Non-Notified Factoring
The law recognizes two approaches:
- Notified Factoring: Customers are informed that invoices are assigned and must pay the financier directly. This maximizes transparency but can affect client perception.
- Non-Notified Factoring: Customers remain unaware of the assignment, allowing businesses to maintain client relationships and manage payments as usual while remitting proceeds to the financier.
By outlining both options, the law gives SMBs flexibility to balance confidentiality and transparency according to their needs.
How the Factoring Law Helps UAE SMBs
Extended payment cycles — often 60–90 days — have long strained SMB cash flow. The Factoring Law introduces a clear and enforceable way to unlock liquidity from receivables without traditional borrowing.
1. Legal and Secure Invoice Financing
Before 2021, invoice financing operated in a grey area. The new law clarifies that assignments are legally binding and enforceable in UAE courts, providing a transparent framework that reduces fraud risk and disputes.
For SMBs that previously relied on secured loans, factoring offers a practical alternative — using receivables as the collateral rather than physical assets.
2. Improved Cash Flow and Financial Flexibility
With factoring, approved SMBs can receive up to 95% of invoice value within one to two business days of verification. This access helps cover payroll, buy inventory, or take supplier discounts without waiting for client payments.
Both notified and non-notified options are allowed, enabling service-based firms to protect client confidence while maintaining liquidity.
Digital platforms such as Kema have made this process smoother. Kema integrates with leading ERP systems — including Odoo, Microsoft Dynamics, Zoho, QuickBooks, and Workday — to sync invoices and receivables data automatically, reducing manual work and keeping finance records up to date.
3. Compliance and Documentation
To qualify for financing, receivables must represent legitimate, completed transactions with no disputes. Assignment agreements should clearly specify invoice details, amounts, payment terms, and debtor information.
Businesses must also meet KYC and KYB requirements and provide financial statements and AECB credit reports. These checks protect all parties and build long-term credibility.
Importantly, while businesses guarantee the authenticity of receivables, they are not liable for customers’ payment delays or defaults, provided they promptly disclose any emerging issues.
4. How Invoice Financing Works in Practice
The process begins after goods or services are delivered and an invoice is issued. The business submits the invoice to a licensed financier. Once verified — confirming delivery, invoice validity, and debtor creditworthiness — the financier advances typically 70–95 percent of its value.
When the customer pays, the financier releases the remaining balance after deducting agreed fees.
Funds are usually disbursed within 1–2 business days of invoice approval, depending on due diligence and verification speed.
5. Role of Technology in Factoring
Technology has modernized a once manual process. Digital platforms now integrate with ERP systems to automate data sync, reminders, and reconciliation, giving SMBs real-time visibility over their receivables and financing status.
Kema’s platform combines accounts receivable automation with built-in invoice financing, letting businesses handle everything — from invoice creation to payment collection and funding — in one interface.
These systems also enhance compliance by maintaining audit trails and validating invoice data before submission. Automated AECB checks and secure workflows make financing faster and safer for all parties.
“Invoice finance is not just about accessing cash quickly; it's a strategic tool that allows businesses to scale confidently while maintaining strong relationships with clients and suppliers.” — Jack Dowling, Corporate Finance Associate, Enness Global
Choosing the Right Factoring Partner
Selecting a reliable partner is critical. Key criteria include:
- Regulatory Transparency: Ensure full KYC/KYB compliance and clear contract terms.
- Technology Integration: Look for seamless ERP connectivity for real-time updates.
- Confidentiality Options: Non-notified factoring helps protect client relationships.
- Fee Clarity: Typical fees range 1.5–3% per invoice, depending on customer credit and terms.
- Funding Speed: Reputable partners disburse funds within 1–2 business days of approval.
- Support: Dedicated account management and responsive service make a real difference.
A strong partner should feel like an extension of your finance team — understanding your cycles, respecting your clients, and delivering dependable funding when needed.
Key Takeaways
1. Factoring Is Now Legally Recognized
Federal Decree-Law No. 16 of 2021 makes receivables financing fully enforceable, giving SMBs confidence to turn invoices into reliable cash flow.
2. Digital Platforms Simplify the Process
Modern platforms automate invoicing, reminders, and document management, making it easier to stay compliant and efficient.
3. Access Working Capital for Growth
With legal certainty and digital efficiency, businesses can convert receivables into working capital without new debt — investing in growth while maintaining client trust.
FAQs
How does the UAE Factoring Law help SMEs compared to traditional financing?
It provides a lawful, transparent way to access working capital using unpaid invoices as collateral, without pledging hard assets. Funds are typically available within one to two business days of approval, subject to documentation and credit checks.
What’s the difference between notified and non-notified factoring?
In notified factoring, customers are informed and pay the financier directly. In non-notified arrangements, customers remain unaware and pay the business as usual, which then remits proceeds to the financier.
What should UAE SMBs do to comply and qualify for invoice financing?
Maintain accurate financial records, complete KYC/KYB requirements, and work with compliant platforms that follow Federal Decree-Law No. 16 of 2021. Ensure assigned invoices are valid, undisputed, and supported by delivery or service completion proof.
In summary:
The UAE Factoring Law gives SMBs a clear and enforceable framework to unlock cash tied up in receivables. Combined with trusted digital tools like Kema, it empowers finance teams to manage liquidity with confidence — efficiently, transparently, and on their own terms.
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