How the factoring business can help small companies  

Source: Livemint

Relevance: Factoring will be one of the measures to revive MSMEs.

Synopsis: Recently, the  Lok  Sabha  cleared  the  Factoring  Regulation (Amendment) Bill that aims to support this sector.

Introduction:

Micro,  small  and  medium enterprises (MSMEs)  persistently  face  payment delays from large clients. This hurdle will be tackled by factoring businesses.

What is factoring business?

• When MSME suppliers have to wait long for payments, they sell the purchase invoices to factoring businesses.
• These businesses buy the invoices at a discount so that MSMEs get their money quickly. Thus, factoring helps small firms to manage their working capital cycle.
• Non-banking financial companies (NBFCs) and firms need a license to be in the factoring business, but not banks and statutory corporations.

How it is done?

• Factoring is done manually as well as over the electronic exchange called Trade Receivables Discounting System (TReDS).
• RXIL, Invoicemart, and M1xchange are three such platforms for online factoring.

What does the new Act seek to achieve?

Read – Factoring Regulation (Amendment) Bill,2020

Benefits to small businesses:

• Firstly, due to pandemic MSMEs suffering from the stretched payment cycle.
  • It has lengthened the payment wait for MSMEs. A vibrant factoring industry will make financing smooth for them.
  • It will improve their ability to purchase from large producers, which will help in repairing the supply chain disrupted by the pandemic and mobility restrictions.
  • More players in the factoring business are expected to improve competition and efficiency.
• Secondly, one difficulty MSMEs have in access to credit is the absence of physical assets against which lenders could give credit. A robust ecosystem of factoring in this context assumes significance.

Hence, the number of players, as well as the factoring transactions, is expected to go up once the changes take effect.