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.


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?

ReadFactoring 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.


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