Usually, non-bank financial companies (NBFCs) mainly oversee the financing needs of micro, small and medium-sized enterprises (MSMEs). Favorably, the Factoring Regulation (Amendment) Act 2021 published by the RBI in January aims to broaden the participation of NBFCs in the factoring industry, thereby expanding opportunities for working capital credit even to small businesses. businesses. Therefore, factoring can be a better alternative to get financing for MSMEs now.
Before we dive into the benefits of factoring for MSMEs, let’s understand what factoring is. The term factoring refers to a transaction in which an entity (such as an MSME) sells or mortgages its receivables to a third party – a “factor” (a financial intermediary such as a bank or NBFC), to obtain immediate funds. The immediate benefits of factoring are access to available capital for MSMEs, which is consistent with invoice discounting.
Since the RBI simplified the rules for NBFCs, they are now empowered to make inroads into the factoring business. This welcome move is expected to boost NBFC’s loan portfolio and provide rapid loans to MSMEs. Until now, many NBFCs operated on the age-old model of focusing on asset financing. I consider the asset financing model to be detrimental to the growth of MSME as well as their efficient use of working capital. The importance of understanding working capital management and the need for additional working capital should be one of the priorities for MSMEs in running their business. In this regard, factoring plays an important role in working capital management.
Working capital requirements for MSMEs can be triggered due to various factors such as the occurrence of seasonal differences in cash flow, business improvement and crisis management events. Other factors may include paying salaries to temporary employees or bearing the costs of other project-related expenses. These challenges faced by MSMEs can be solved by leveraging the factoring services of NBFC-Factors.
Benefits of the Factoring Regulation (Amendment) Act 2021
Since the announcement of the Factoring Regulation (Amendment) Act 2021, many doors have opened for NBFCs and MSMEs to experience exponential growth. First, the act empowers the central bank to enforce standards that promote better oversight of the $6 billion factoring market. The law has many advantages, viz. it eliminated the need for a factor to report every transaction and entrusted TReDS exchanges to report on their behalf, opening the field to NBFCs that do not operate as specialized factors.
5 reasons why factoring is the most effective low-cost working capital solution for MSMEs
1. There is no need for collateral security. This will eliminate the need for bulky documents.
2. Factoring is not required to appear as a loan on the balance sheet.
3. The increasing use of technology will be employed. Customer experiences as borrowers for MSMEs will be improved and NBFCs will be able to retain their customers.
4. Smoother and faster availability of working capital will automatically translate into faster turnaround time.
5. Businesses will now only pay for what they use. Working capital based on fixed cash credit will not be required.
Read also : How prioritizing financial education is critical to improving the MSME sector
Factoring Services Insights – The Way Forward
Once new factors come into play, working capital volumes could rise to the rescue of many MSMEs, and one can only look up from now on. The government is committed to supporting the MSME sector for its vast employment potential and the quality of goods produced. A series of measures to develop the MSME sector have already been announced, which is a win-win situation for all stakeholders. It’s time to take the factoring route and help your businesses grow faster.
The opinions expressed in this article are the personal opinion of Dr Ravi Modani. CEO and CEO of 121 Finance.