Enterprise Issues
With Siaka Momoh
Factoring is not a common form of finance for small enterprises in Nigeria. Banks grant most factoring done to companies in the oil and gas sector or large corporate clients.
Factoring is a financial transaction whereby a business sells its accounts receivable (i.e., invoices) to a third party (called a factor) at a discount. In “advance” factoring, the factor provides financing to the seller of the accounts in the form of a cash “advance,” often 70-85 percent of the purchase price of the accounts, with the balance of the purchase price being paid, net of the factor’s discount fee (commission) and other charges, upon collection from the account client. In “maturity” factoring, the factor makes no advance on the purchased accounts; rather, the purchase price is paid on or about the average maturity date of the accounts being purchased in the batch.
In other sectors, where the value chain is not as well understood, banks perceive higher risk in providing factoring finance to SMEs. But reports show that finance houses have been providing short-term working capital loans for SMEs, providing some factoring and purchase order financing. But the truth is, factoring in small business sector has not taken strong root. There is need for small business operators to explore this attractive funding option.
We can take a cue from India whose case is similar to ours. The role of a factoring business is yet to gain ground in India, wherein small and medium enterprises (SMEs) struggle to get funding support from banks on concern of asset quality. At a little higher cost of funds, a factoring company can well be the liquidity generator to stimulate the SME growth engine.
According to Sudeb Sarbadhikary, CEO, and India Factoring – a Mumbai-based standalone company, the business volume is increasing for factoring companies even as banks’ credit is contracting. SMEs generate the majority of country’s (around 75%) employment and they should keep growing with free fund flows.
“SMEs are promoter driven company with limited resources. The challenge is that money is blocked for 6-12 months, leading to liquidity stress for them. In FY12, our business volume was at Rs 2,500 crore, while we aim to take it to Rs 5,000 crore in FY13. We have around 200 SME clients, which form around 90 percent of the total kitty. It was around 160 in the previous year,” he told moneycontrol.com, in an exclusive interaction.
The year-on-year business growth is on a lower base, as the company was started in December 2009. There are around 10 factoring companies in India. Can bank Factors and SBI Global Factors are two of the oldest factoring companies in India. As of now, the total size of factoring business volume in India roughly stands at around Rs 17,000 crore , which according to Sarbadhikary, forms around 0.30 percent of the total banks’ credit in the country
How it works
Small businesses sell their products to other big companies, which do not immediately release cash. Meanwhile, the former, with limited wherewithal, require more funds to expand their business. Banks are not so keen to extend credit to them beyond a point.
Here comes the role of a factoring company, which gives 80 percent of the assignment money upfront at an interest cost in the range of 14-15 percent per annum to the seller (chargeable on monthly basis). The factor will recover the money from the product buyer after a stipulated period. If the SME client does not repay interest, the factor will deduct it from the rest 20 percent at the time of final realisation.
Does it require any collateral?
“Banks want more collateral against loans. Factoring companies are relatively flexible. If we are satisfied with the quality of the debtors, we then are not hooked into collateral. In the last few years, we have seen SMEs are getting starved of traditional liquidity. In the recent time, a lot of new clients are approaching us,” the CEO said.
Increase in factoring demand
No doubt, it is banks’ drying up credit. In the wake of rising bad loans, banks have of late, become very selective about sanctioning SME loans. Other major trigger is the Factoring Bill enacted by the Parliament in January 2012.
“Factoring Bill brought in clarity of assignments. Earlier, we did not have any right to proceed legally against the buyers (on behalf of SMEs) in case of any default. Moreover, we could not expect our clients, who own smaller business entities to pay off the debt. The Bill now empowers us to have the same legal right,” Sarbadhikary said.
Following the Factoring Bill, the Reserve Bank of India issued guidelines creating a new non-banking finance category christened NBFC-Factors. This has separated the class from other NBFCs, which have been facing a slew of regulatory issues.
Capital infusion and fund raising
Shareholders of India Factoring include Punjab National Bank (30%), Malta-based FIMBank (49%), Italy-based Banca IFIS (10%), Blend Financial (1%), and employees’ ESOP (10%).
