Factoring as a Business Enabler

Factoring as a Business Enabler by India Factoring

India is currently the fifth largest world economy, with GDP of USD 3.3 trillion, and the government has announced a GDP target of USD 5 trillion by 2028. Despite significant global challenges, India is one of the fastest growing major economies in FY22/23, at 7.2%. This underscores the strong domestic demand, continuity in policy reforms, and a strengthening financial sector.

Supply Chain Finance and Factoring (receivables financing):

Supply chain finance (SCF) in India dates back to the 1980s, when the concept of factoring was first introduced. While traditional security backed financing by banks had enabled the growth of the post liberalisation era in India, the focus shifted towards SCF in recent years – a more comprehensive solution that involves multiple parties. Factoring as well, both non-recourse and recourse fronts, is a favoured choice among sellers in the current market.

Especially the MSME sector contributes 30% to India’s GDP, 45% to manufacturing output, and 48% to exports. The credit gap in the MSME sector is estimated to be USD 250 billion or Rs. 20 Lakh crores. MSME and mid corporates (sales<Rs.1000 crores) offering credit period ranging from 45 days to 120days have to wait for the proceeds and also carry default risk of buyers. While Indian govt. mandates the buyers to pay MSMEs in 45days, exporters cannot stipulate such timelines in B2B export sales which happen majorly on open account terms. Also one unexpected bad debt can derail a mid sized firm’s growth aspirations. Non recourse factoring (receivables finance) is most sought after the product to resolve risk mitigation and cash flow issues at once.

Factoring as Business Enabler:

• Non-recourse factoring is a new age financial product, bundled as WC + risk mitigation product .
• While business growth is paramount, it’s also important to protect the receivables and having no bad debts in the growth path.
• With increase in benchmark rates and liquidity tightening, more buyers may seek extended credit period. Allowing same will sustain/increase orders.

How? :

• Prepayment of receivables upto ~90% upon shipment. Trade documents to be uploaded electronically.
• Factoring as a product offloads the risk from seller’s books and transfer to the underwritten factor. Since the risk is transferred to us, you can concentrate on core business.
• Factoring allows additional credit period to buyer without stretching the working capital cycle. Also since risk is transferred, can take orders which otherwise may not be entertained. This enables more orders from the buyers.
• Unsecured, off balance sheet product. The factoring line won’t appear as debt on balance sheet since recourse is on buyer. No NOC needed from existing banks .
• Entire recourse is on Buyer, any non-realization due to financial difficulty or bankruptcy of buyer will be dealt without recovering from the seller, when performance obligations are met.
• Factoring avoids dealing with post facto claims with clauses runs into pages and take multiple years to settle.

India Factoring & Finance solutions pvt ltd (India Factoring) is market leader for factoring in India offering unsecured, non recourse lines under globally recognized Factor Chain International (FCI) two-factor model. Can connect with Mr.Gopi Krishna, AVP at 84518 20096.

Overall, the SCF industry in India is witnessing tremendous growth, and the trend is expected to accelerate further, driven by factors such as impressive GDP growth, consistent policy reforms, growth of the financial ecosystem, and efficiency gains from digitalisation. Further regulatory enablers like TReDS, ITFS and various others are expected to propel growth at even faster levels.

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