Factoring services for quick cash flow solution


A Major Lifeline for SMEs


SBI Global Factors

Factoring services for quick cash flow solution

"There is a vast segment of small business rendering support to large corporate entities, which are well-placed to earn a stable income and are realistically seeing greater earning opportunities. But they also require steady cash-flow to replenish their routine expenses, perhaps on day-to-day basis. Transport and logistic services depended on manufacturing companies, BPOs and KPOs; small enterprises working on contract terms for large establishments for regional and local after-sales services and many such assorted sectors are looking for cash-flow supports. For them factoring service is the most ideal tool that can ease out their worries after raising invoice."

Mr Tushar Buch, Managing Director and CEO, SBI Global Factors Ltd

 

For every enterprise facing working capital problem even after execution of huge sales orders due to delayed payment and that again renders difficulty to execute next orders, SBI Global Factors (SBI GFL) offers quick and easy remedy through factoring services. In fact, this is a complimentary to the working capital systems. Entrepreneurs do not need any further guarantee or collateral security for quick payment provided by SBI GFL against their invoices. As much as 90 per cent of the invoice value is disbursed instantly. A subsidiary of State Bank of India, SBI GFL is specialised in providing liquidity/working capital against invoice of sales proceeds and also provide collection and follow-up services - through factoring process.  Their business is to move transaction risk in domestic as well as export trade from the seller to the buyer.

India has a fertile market for factoring business by virtue of having a huge number of small and medium enterprises (SMEs) with heterogeneous business nature and in the context of the level of challenges they face in collection of payments after product sales. Yet the potential remains untapped, vastly untapped, as it seems to be pitted against the banking service called cash credit and bills discounting on one hand. On the other hand, there are other reasons too for its little popularity; the most common being the absence of a professional payment agreement between sellers and buyers in manufacturing business as well as service providers and end-users in service business.

Many small business units are confronted with a hand-to-mouth situation. The more the payment is delayed, the deeper will be their crisis. As a last resort, some entrepreneurs depend on private money lenders for quick liquidity solution, which land them in to deeper troubles. Now the windows of private money lenders also getting shut after the demonitisation. Those who have collateral securities get cash credit from commercial banks.  And that too after a close scrutiny of their financial statements – no matter how prestigious and lucrative a new order may be! But factoring service that chases up invoices for payment, makes the entrepreneur use the money for running his business while eliminating the worries of sales collections. It is often seen, the buyers discourage sellers to go for factoring service to avoid answerability of delay in payment, which they are not supposed to do. Sometimes, the buyers also do not co-operate with the factoring company. There are legislations that insist timely payment to MSMEs. However, even large companies are careless about it, throwing the finances of a small player into disarray and helplessness. Only a factoring service provider can play a role in this to ease out the crisis of small enterprises which wait for the invoice realization to resume their operation.

In most SME cases, the operational systems are in disarray and unprofessionally organised without proper book-keeping and account maintenance. Often buyers resort to off-the-record cash transactions, denying the sellers the facilities of factoring services thereby weakening the vendors’ capability to run the business. In some cases, even if the sellers want, the buyers do not want assignment arrangements with them to make them unable to take supports of factoring services. This is also commonly seen, with scope for improvement, if SME sector is to be given any boost. Often, many large corporate buyers do not stick to payment schedules landing the hapless vendors into financial troubles.

Some suppliers manage to get bills discounting facility from banks, but not all. Some of the business firms also are tempted to avail cash credit limits which are available on tap by submission of a mere book statement to Banks and divert these funds for long term use..  In process they neglect paying attention on timely realisation of invoices that otherwise would have replenished their business expenses. Wherever there is a possibility of bill discounting, they approach their bankers ending themselves up in miscalculation and consequent discomfiture. Their poor awareness about the benefit of factoring services and unhealthy business practice make them ineligible and inaccessible to the novel products, which are popular in all strong economies in the world.

Growth in factoring services can herald a change of fortunes in our country, especially for MSMEs.  SBI Global Factors (SBI GFL), India’s largest factoring service provider sees new opportunities where its business can thrive and has been shaping its strategies to tap hidden opportunities by widening its scope to include newer sectors, says Mr Tushar Buch, Managing Director and CEO of the company. “We understand that we have to reach out to a wider client base. There are many clients, who are in new genre of business rendering support to large domestic and global clients, who will find factoring services fit for their business. Large enterprises have an elaborate procedure for processing payments. This makes small enterprises wait –often with longer than reasonable delay beyond due date of payment, for realization of their dues. Many a time it happens that small players who are engaged in providing after-sales services of large global firms are unable to follow-up with their client for the payment. Factoring service is the most ideal way for their transactions, especially if they deal with large corporate enterprises, he points out.

According to Mr Buch, there is a vast segment of small business in the unorganised sector rendering support to big businesses, which are well-placed to earn a stable income and are realistically seeing greater earning opportunities as the nature of orders flowing in shows. But they also require steady cash-flow to replenish their routine expenses, perhaps on day-to-day basis. Transport and logistic services depended on manufacturing companies, BPOs and KPOs; small enterprises working on contract terms for large establishments for regional and local after-sales services and many such assorted sectors are looking for cash-flow supports as they have potentially profitable business.

Going by India's present business dynamics, the service sector makes an increasing contribution to the overall economy. Many of the new economy business, by virtue of their nature as service business, do not have tangible asset at their disposal, but they have invaluable talents to build business on talent oriented new economy segment. The talent driven businesses develop and deliver products which are also vulnerable to delay in realisation of their service value. Commercial lenders may not be willing to extend their cash-flow support to such business. Many such enterprises and start-ups are promoted by technocrats and do not have the muscle to sustain delayed payments, points out Mr Buch.

Closer studies on the nature of various businesses and risk they face after delivery of products to cross-border markets due to economic and political issues reveal that there is a big space for factoring business in India. Suppose, when a pharmaceutical company, after spending a long time and huge money on research and development (R&D) and successful development of drug delivery systems, develops a molecule that is set to realize its commercial benefits, it finds uncertainty of payments from overseas buyers. That renders a severs shock dragging them into uncertainty. Which institution can save such companies? “But we can address such concerns using our knowledge of both domestic and overseas markets, delivery capability and resources,” says Mr. Buch. Many companies face such uncertainties after delivery of product and services. They can safely depend on SBI GFL, for collection of their dues, he adds.    

Every business faces economic and political risks. "Sometimes, we see large firms after spending too much on their product development, procurement of substantial orders and huge size delivery to overseas customers, face economic and political crisis in the buyers' market. They face unanticipated payment crisis.  We would possibly find a solution under 2-Factor Export Factoring Model" says Mr Buch.    

While factoring company undertakes a transaction based on strength of the buyer/transaction structure, commercial banks take decisions on the basis of a customer's financial history and strength, cash-flow and collateral. 
Empirical evidences show, once factoring companies establish relationship, they are able to turn around the proposal within days, much faster than banks do.
This means when an enterprise builds relationship with a factor, every future transaction becomes easier, books become more disciplined and their modus operandi more professional and healthier. The factoring service provider comes closer to the clients and understands their nature, besides speeding up their payment cycle. The factor assumes responsibility for collection of receivables under the factoring agreement. SBI GFL has highly sophisticated systems in place for tracking receivables on invoice to invoice basis, thanks to its cutting edge technology platform. Bills discounting would hardly bring such comforts. It also has enough financial wherewithals to meet the demands from all types of business units.

 Many businesses would thrive on the changing course of India's economy over a period, offering potential opportunities. The small enterprises can grow flawlessly once they get spontaneous cash-flow. “As many large corporate houses bank with State Bank of India, their vendors can be served in an appropriate way by us,” he opines. That may help SBIGFL, a member of FCI (formerly Factors Chain International), explore more opportunities, he agrees and says, “we can support their vendors in a way that is convenient for both the parties.”

The factoring services come with various business-friendly advantages, besides making one adopt the best business practices, fetch many comforts through assigning payment follow-up challenge to the factors, timely realisation of invoice that would reduce the cost of funds used for running business, etc. Once an invoice is factored for, as much as 90 per cent of the value is disbursed instantly, merely on assignment of the receivables by the seller. In this case invoice is their security. In fact, factoring services are usually business friendlier and more flexible that require no guarantee or collateral for instant disbursement. That is the reason world over this service has been growing at a significant rate. Studies of FCI show global factoring business has grown four times faster than the world economy over the last three decades. But the growth in India, in one sense the most suitable market for factoring service proliferation, has been slow. In fact, while globally 40 per cent of the working capital is generated through factoring services, in India its size is only less than two per cent of the total working capital disbursed to businesses. “Still, we have hopes. There is a huge legroom for expansion of factoring business. Now we are finding enough ways to grow as we are working actively to reach out to the deserving and eligible business units, which require instant funds to keep their business going,” says Mr Buch.

During the crisis period, especially when banks are cautious of lending for fear of their rising bad loans, many SMEs are unable to obtain traditional bank funding. Moreover, SMEs are usually perceived to have a higher probability of default compared to larger firms and their vulnerability to economic downturns is much higher. In such context, factoring services fill the space. Now even large size businesses also are vulnerable to payment crisis, where factoring service has a role to play.

Every business, irrespective of their nature and size, in fact, requires continuous cash-flow for flawless business operation and growth. Sale of products may not ensure instant cash or realisation of bills even for a monopoly player. Suppliers will have to wait and the waiting period should not halt the business function. Sometimes even large players with monopoly position in the market face payment crisis under various unforeseen circumstances. Factoring service facilitates sales on open account terms and makes funds available to the seller against sales instantly in both domestic and international markets. The buyer is also saved from the cumbersome process of opening LCs and seller is saved from the cost of LCs, which buyer generally passes on to the seller under LC transaction.

SBI GFL offers both domestic and international factoring solutions (see product at a glance below). It has 10 branches across the country. Its best in class technology platform enables every enterprise to access its service for both domestic and export factoring services from anywhere in the country. It has a high-end customized IT platform for processing and delivery of its services. This ensures shorter turnaround time for approval. It offers online web access to its clients for accessing their accounts. Its Client Access module is custom-made to suit the business profile in tune with the client requirements.

With export factoring as one of the important products in its basket, it has $30 million line of credit from its parent, State Bank of India. “That has given us a good comfort and now we have enough wherewithal to finance the export factoring demand,” says Mr Buch. SBI GFL has a massive correspondent network in more than 75 countries for follow-up of Indian companies' receivables by virtue of its membership of FCI+ (formerly Factors Chain International). Indian companies with business in global market can take home this advantage for early realisation of their dues, setting aside all woes of follow-up with clients of faraway markets. About 25 exporters now avail its export factoring services.  SBLGFL’s export factoring product offers services like credit assessment, credit protection, financing and collection services from import markets to exporters for regular sales on open account terms.

Now things are moving fast; factoring service providers also began to explore opportunities, there are better operational comforts and above all safety is also being brought in by way of guarantee. by a Trustee with a corpus funded by the Union government (see box) The management expects a radical growth in its factoring business turnover, which is currently around Rs 3000 crore. It aims to double its turnover in the next couple of years. Besides the turnover target, the company is also working actively on acquiring new client base and retaining the existing ones for longer period through value added services giving individual attention. Having strong fundamentals and powerful parent, it has access to cheaper funds, which can help it lend the client at more attractive rates, Mr Buch points out. “Moving a step ahead, I believe in taking a calculated risk to some extent. In all our recent efforts, we have been successful. Some results have inspired us to continue with our exploration for new client base and business,” he says with a new optimism. As SBI GFL closely studies more segments which render ground support to the booming e-commerce, it is set to open new frontiers and finds new business cases that suite to its business, the overall factoring service business in India will find new hopes and valuable guidance for the industry as a whole from the biggest player in the industry.  

State Bank of India bought 92.08 per cent stake in the erstwhile Global Trade Finance (GTF), which was originally promoted by Export Import Bank of India, West LB, Germany; and International Finance Corporation in 2008. In March 2010 SBI Factors and Commercial Services, SBI’s subsidiary made a reverse merger with GTF, which led to the creation of SBI Global Factors.

 

·    The factoring service is vulnerable to risks. We are trying our best to stop the slippages, says Mr Buch.  The establishment of Credit Guarantee Fund for Factoring gives the players some hopes though the scale is still limited.

·      SBI GFL with a capability of world-wide reach and sway in the domestic market by virtue of its parent firm that is India's largest commercial lender is in a position to help not only small and medium enterprises but also sometimes mid-corporate group companies facing cash-flow problem despite having already executed huge orders. Timely realisation of invoice has always been a big challenge for suppliers, so is naturally the task of maintaining their cash flow position. Often it is seen the late reaslisation of cash-flow spoils business opportunities and mess up all calculations. An enterprise cannot wait for resuming the operation until the realisation. They need cash to flow in to keep their business alive.

·        Factoring services can also be a good tool for assessing the actual sales performance of a business, discouraging the unhealthy practice of doing business through grey market route and off-record basis. Buyers, who are often keep the suppliers waiting for longer period, also will be obliged to pay the money on time. Factoring service providers also follow-up with the buyers for payment.  

 

Quote 2

“Delayed payments are still big challenges for small enterprises. Under this circumstance, having nothing to provide as collateral for working capital from banks, many enterprises are forced to look at informal lenders. These informal lenders also seem to have problems now after demonitisation. That would make them look at factoring services, the most suitable way for them to meet their liquidity requirements for flawless business operation. It is high time for Indian factoring services to reach out to the small enterprises more aggressively and help them ease out their worry about working capital that is replenished through their own invoices. Once a seller buys factoring services, besides getting money in advance the tasks of follow-up and collection are transferred to the factors.”

Mr. K.I Mani, Director, SBI Global Factors      

 

Quote

 “In my opinion factoring has a positive outlook with a future of continuous growth. Factoring is a financial and credit service, which provides the most convenient solutions to solve exporters’ and importers’ needs, becoming a powerful financial and credit engine, particularly for SMEs”

Michel Leblanc, Chairman, FCI (formerly Factors’ Chain International) a global umbrella organization of Factors, headquartered in Amsterdam (Source : FCI Annual Review 2016)

 

Quote

“Factoring is an alternative and flexible means of finance which is widely used especially amongst SMEs. This is achieved by the supplier assigning and selling its accounts receivables to a bank or non-banking financial institution. The factor will provide a range of services to its clients, including providing capital against the assignment of their receivables, accepting the risk of bad debts and collecting on past due accounts.” 

Peter Mulroy, Secretary General, FCI (formerly Factors’ Chain International) (Source : FCI Annual Review 2016)


Quote

“By focusing on services sector of the economy (logistics, fleet transport, ITeS, housekeeping etc.), SBI Global Factors Ltd. has found a niche segment to grow rapidly in Receivables Finance & Management market.  It has already taken rapid strides in Export Factoring under 2-Factor Model since 2014.  We expect it to play a greater role as an SBI Group NBFC”.

Ravi Nandan Sahay, Chief General Manager (Associates & Subsidiaries) State Bank of India.

 

Products at a glance

Domestic Factoring

Domestic factoring is a process of factoring of accounts receivables generated out of sales within India by a business enterprise. The seller assigns to the factor the accounts receivables arising out of sales to buyers within the country on open account terms and receives payment instantly against it to the extent of 80-90% from the factor, depending upon the credit terms.

Characteristics of Domestic Factoring Receivables

·        The seller’s performance obligation should be completed before availing funding.

·        There should be a continuous sales flow on an ongoing basis with the same buyer or set of buyers.

·        This product is suitable for credit terms of 30-90 days.

·        Transactions between two parties should be on ‘open account’ terms

·        Credit sales to a buyer to be assigned to SBIGFL on a continuous basis, once the factoring arrangement is in place.

Export Factoring

Export factoring is a process of factoring of accounts receivables generated out of sales in foreign markets by an Indian business enterprise. The seller assigns to the factor the accounts receivables arising out of exports from the country on open account terms and receives payment instantly against it.

Necessary contexts

·        To ward off the risks arising out of non-payment, political risk, commercial risk, exchange control risks etc.

·        Sue to difficulty in ascertaining the buyers’ financial situation and sovereign risk.

·        For preventing lower realization in respect of sales against LCs due to deduction of LC costs by the buyer.

·        To stem difficulties due to uniqueness of different geographies with respect to currency, banking system, local trade practices and legal system.

·        Customer's preference to trade in local currencies.

·        To find a way out of domestic banks refusal to provide necessary financing on export receivables, which arise out of trade on open account terms.

SBIGFL covers credit risk of the exporter under two factor model of FCI. Under this model, there are four parties involved in a transaction: the exporter (seller), the domestic factoring company (viz. export factor), the foreign factoring company (viz. import factor) and the customer (buyer).  The import factor does due diligence on the buyer and provides a credit insurance cover or service trading which the Indian exporter has immense benefits.


Dealership Factoring Facility

Dealership Factoring is provided to the dealers, who are buyers of industry majors – the seller in the process within India. 

Features of Dealership Factoring

Dealership factoring facility is without recourse to the seller. However, it will come with recourse to the seller, in case of any commercial or quality dispute between the seller and the buyer or if the invoice is not accepted by the buyer.

SBIGFL considers sanction of dealership factoring facility to the dealers, based on strong recommendations of seller, who may be an industry major by way of a comfort letter, backed by tripartite agreement.

Vendor Financing

Vendor financing enables the client s, which are usually blue-chip corporate to purchase from its vendors and suppliers on short term credit of up to 90 to 120 days on open account terms. In this case the vendor bears the finance charges against this facility.

 

Product features

·        Finance up to 100 per cent of the invoice value

·        Credit period of up to 120 days to the buyer

·        Paperless processing capability

Benefits over usual bank finance

·        No need to open LCs by buyer, enabling cost savings on this process.

·        Lower interest rate to vendors on the basis of credit worthiness of buyer

·        No or nominal marginmoney

·        Payment made on delivery of goods to the suppliers

·        Credit period upto 120 days for buyer

·        Buyer can avail discount from suppliers for early payment

·        Paperless real time transactions 

 

LC Bill Discounting for export and domestic

Under this facility SBI GFL discount bills under the LC of prime banks acceptable to SBIGFL and offers both domestic and export LC bill discounting at comprehensive rates.

Features

·        Financing the seller up to 100 per cent of LC Value

·        Maintenance of ledger  relating to accounts receivables

 

Bank Guarantee backed factoring – Domestic and Reverse (Purchase Bill) Factoring

SBIGFL has introduced this product for MSMEs to help trade on open account terms.  The credit requirements are assessed on fast-track and a simplified model.  Client is able to monetize his unused non-fund based limits sanctioned by his Bank by getting one time guarantee issued in favour of SBIGFL.

 

Features  

·        Financing the supplier by prepaying up to 95% of the invoice value / bill value (pre-payment can be extended to 100% in select cases)

·        Credit of upto 120 days.

 

Credit Guarantee Fund for Factoring

This is a good initiative, which can stimulate the hitherto slow growing factoring services, which had no legal route to recover their money in case of buyers’ refusal of payment, says Mr Pradeep Malgaonkar, Chief Executive officer of CGTMSE, who is also in charge of CGEF.

In December 2014 the Union Cabinet approved a Trust Fund with a corpus of Rs 500 crore as Credit Guarantee Fund for Factoring (CGEF). This is set to guarantee factored debts supported by factoring service providers and to encourage factoring of receivables of MSMEs in India by promoting “factoring without recourse” and to increase the gross annual factored debts to Rs 20,000 crore within next five years. This is expected to result in an increase in the share of MSME portfolio in the factored debts from the current level of 27 per cent to significantly higher levels. At present, the factoring without recourse constitutes only a negligible share of total factoring business. This would be brought to the level of at least 25% in the first year and 50% by the end of the fifth year and thus address a major gap in the MSME sector. In fact, CGFF is expected to facilitate gross factoring transactions of over Rs. 20,000 crore a year by the end of the fifth year. The scheme will cover only the domestic factoring of receivables of MSMEs in India. under the scheme, the t he exposure limit for purchaser would be up to 10%, which is relaxable up to 20% in case of AAA (triple A) rated purchasers of the corpus of Credit Guarantee Corpus Fund for Factoring as per the last audited figures for factoring ‘without recourse’ only. The Trust will charge a guarantee fee of 0.10% per month for factoring with recourse and 0.12% per month for factoring without recourse on the outstanding balance at the previous month end.

With regard to the credit guarantee cover, the first loss of 10% of the amount in default would be borne by factors and the remaining 90% of the amount in default would be borne by NCGTC and Factors in the ratio of 2:1 respectively. As far as claim settlement is concerned 75% of the claim amount shall be settled within a period of 120 days from the date of the lodging of claim and completion of required documents. The balance 25% of the claim amount shall be paid after 24 months from the date of first settlement or exhausting all legal remedies based on a certificate from the factor, whichever is earlier.

This is a good initiative, says Mr Pradeep Malgaonkar, Chief Executive officer of CGTMSE, who is also in charge of CGEF. This initiative can stimulate the hitherto slow growing factoring services, which had no legal route to recover their money in case of buyers’ refusal of payment. Now one of the major concerns of factors, slippage of asset quality, could be addressed effectively and factoring service providers can ease out their worries.