A major issue faced by MSMEs is payment delays by large clients, often adapted well by factoring businesses. To support this sector, the Lok Sabha on Monday passed Factoring Regulation (Amendment) Bill. To understand this, first, let’s understand what factoring businesses are.
Factoring Businesses and their role
The purchase invoices are sold to factoring businesses when MSME suppliers face delayed payments from clients. Once these invoices are purchased at a discount, MSMEs gain a certain quick profit. Banks and statutory corporations can be termed under factoring businesses, but non-banking financial companies require a designated license to serve as factoring businesses. Trade Receivables Discounting System (TReDS) is an electronic exchange over which the factoring process takes place. Hence factoring is beneficial for small firms to maintain their working capital cycle.
After sanctioning the Factoring Regulation Act in 2011, the RBI would authorize factorization to NBFCs based on certain principal businesses. The bill aimed to provide access to factorizing business to all other sectors, including the NBFCs. The central registry set up under the SARFAESI Act mandates TReDS platforms with regular reports of the factoring transactions.
Currently, there are 7 NBFC factors, including Canbank Factors Ltd, India Factoring, and Finance Solutions Pvt. Ltd, SBI Global Factors Ltd, Siemens Factoring Pvt. Ltd, Bibby Financial Services (India) Pvt. Ltd, IFCI Factors Ltd, and Pinnacle Capital Solutions Pvt. Ltd. This is sure to increase after the changes come into effect.
Barriers affecting Small Businesses
Some of the barriers that hampered the smooth functioning of small businesses during the second wave of the COVID 19 pandemic included stretched payment cycle, lengthening the payment wait for MSMEs, and many more. Small firms can increasingly purchase from large producers only if they are financially healthy. This would help repair many factors that were affected by the second wave of the pandemic. But with the onset of more players in the factoring business, there is bound to be competitiveness.
Small businesses account for about 45% of manufacturing output, over 40% of exports, and around 30% of gross domestic product. They are also among the key players in providing jobs in rural and urban sectors. Hence creating a robust ecosystem of factoring that helps MSMEs regulate access to credit with physical assets is considered viable in these times.
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