Factoring An Untapped Resource For Indian SMEs

Abstract :

Factoring service, which is perceived as complimentary to bank finance, enables the availability of much needed
working capital finance for the small and medium scale industries especially those that have good quality receivables
but may not be in a position to obtain enough bank finance due to lack of collateral or credit profile. Factoring is making
the small and medium enterprises prosper in one way or the other in terms of financial stability. It offered dedicated services to the SMEs in
managing their working capital diligently.
During the 1960s, 1970s and 1980s, interest rates were on the rise and banks were increasingly regulated. This made it difficult for companies
to get traditional financing. Further, a large section of Micro and Small Enterprises need handholding. The lack of financial literacy represents
a formidable challenge for MSE borrowers underscoring the need for facilitation by banks in these critical financial areas. To effectively and
decisively address these handicaps, RBI introduced a mechanism called factoring, which provides liquidity to SMEs against their receivables and
can be an alternative source of working capital.
World over, factoring is a preferred route of accessing working capital for SMEs and even larger organisations. Factoring became even more
popular, since it did not require the same sort of credit checks. Small business, startups and rapidly growing businesses benefitted especially from
this increase in factoring. Factoring grew as a service as business people found their options contracting.
This paper is based on secondary data and prepared with a view to analyse the pros and cons of factoring services and its magnitude.

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