Factoring services to be new window for SME financing

Namrata Kath Hazarika | 10 Apr, 2010

The credit-deprived Small and Medium Enterprises (SMEs) are likely to benefit from the concept 'factoring services' as it would be an alternative window for SME financing in India.

Opining in this context, Dinesh Rai, Secretary, Ministry of MSME, recently said, "The SME factoring services is another area in India which is rather weak. I feel that, if we can have some better arrangement for factoring services, it will definitely help this SME sector."

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The MSME ministry had an one-to-one meeting recently with the Ministry of Financial Services, where discussion were made on this vital topic (factoring services).

Rai added, "We have scheduled a meeting with the Ministry of Financial services where our ministry tried to put forward some proposals for factoring services. Definitely, there are some legal issues and people who will go forward, will definitely require certain concessions in terms of stamp tax and safety provisions, therefore will help the system to work well."

Factoring is a financial option for the management of all the receivables. It is the conversion of credit sales into cash. In factoring, a financial institution (factor) buys the accounts receivable of a company (client) and pays up to 80% (rarely up to 90%) of the amount immediately on agreement.

The factoring company pays the remaining amount (balance 20%-finance cost-operating cost) to the client when the customer pays the debt. Collection of debt from the customer is done either by the factor or the client depending upon the type of factoring.

Rai also informed that the Ministry of Financial Services are not too much in favor of legislative support. But, he feels that if there is no legislative support, it will be difficult for SME players to attain success in a big way.

"In fact, with the support of factoring services, SMEs can benefit. If I supply anything (i.e goods) then I will get some receipts, on that receipts, I should be able to get money. With the activation of the service, SMEs would require less loan from bank as well," he added.

According to the sources, foreign players such as HSBC, Standard Chartered bank, Citibank have already forayed in this industry (factoring services).