MSMEs that largely borrow funds from internal sources such as loans from relatives and acquaintances and internal accruals or through external resources such as bank credit, short term loans, bill finance commercial papers etc sometimes fall short of collateral and financial records that can stand scrutiny for loan; here factoring can be resorted to as a compliance over the working capital.
What is factoring?
Factoring essentially means to undertake (not necessarily purchase) to collect the receivables and thereby get entitled to all rights of the beneficiary towards specific receivables. Therefore, in a factoring transaction, the seller assigns and transfers all entitlements towards a supply/receivable, to the factor. The Factor finances the seller based on the receivables assigned to him and as acceptable to him.
Factoring and its types
Basket of Services
Factoring services can be:
Factoring service providers
“Besides SBI Global Pvt. Ltd and IFCI factors Ltd, we have Can bank, HSBC, Fullerton India Company Limited, Yes Bank, India Factoring and Financial Solutions Pvt. Ltd. and many more. Many private service providers are also jumping into the fray”, avers Thiru, SM, IFCI Factors ltd.
Who is eligible to avail the services?
“Any small, mid size or big corporate, both export and domestic is eligible”, informs Thiru.
Moreover, according to him, the factors to be considered for factoring are:
Major benefits of factoring
Thiru cites the manifold benefits of factoring as under:
After the applicant submits the form along with important financial details and data, the sanction time is from 7 to 10 days.
Factoring services still to take off
Although, factoring services can solve the working capital needs of the MSMEs yet its penetration in India is very low. As per the report, Factoring turnover in India in 2008 constituted merely 1.24 per cent of total bank credit. The concept is still struggling to find its foothold as both factors and the MSMEs suspect each other.
SBI Global Factors Limited (SBIGFL) is the only service provider of International factoring, import factoring, domestic factoring and forfeiting services under one roof in India. It has established itself as a market leader in international factoring providing improved value added services to its clients.
According to Swati Babel, BDM, the service is still at a nascent stage and still evolving. Their client list include around 5 to 6 companies which is a mix of domestic and export. She further informs that status, constitution, produce line, seller-buyer relationship are a few parameters that they see while deciding to provide factoring services and the maximum amount that they forward currently is 1 cr.
Why is it lying low ?
MSMEs are usually apprehensive about factoring, the reason being lack of awareness about its utility. Moreover, they are hesitant about disclosing commercial details to a third party and also apprehensive about the recovery procedures used by the factoring companies. Factoring services are usually compared with other lending products that prevent this mechanism from gaining popularity over traditional methods. Moreover, the high cost is another deterrent.
Recommendations: In order to help MSMEs, adopt factoring services as a mode of financing. Moreover, factor companies should extend their reach by developing a large, well-connected network backed by state-of-the-art technology and devise appropriate marketing strategies. Companies providing factoring services should provide accounts receivables management to their MSME clients so that they can reduce the collection cost and benefit from factoring.
Moreover, industry associations and factoring companies can jointly organise workshops, seminars, and education & training sessions for MSMEs to improve awareness about factoring products. Taking examples from factoring setups like the NAFIN of Mexico or "The Receivables Exchange" of USA, the government and the industry bodies can develop innovative factoring establishments conducive to Indian industrial environment.
Default and recovery
Mr. Thiru says, “Sales ledgers are maintained by the factor and due dates are closely tracked by a dedicated team available with the factor to avoid any discrepancies and defaults. But we have encountered a few companies that have delayed payments or defaulted. In such cases, the responsibility lies with the seller”.
Hopefully, the hurdles that are blocking the road will clear away and pave way for this wonderful option to become a viable financing mode.