Cash-flow financing route back in vogue as firms chase capital

MUMBAI: Many small- and mid-sized firms are once again taking the factoring route to raise short-term funds. Factoring, or cash-flow financing, is an arrangement in which receivables created out of sale of goods or services are sold to an agency, known as a factor. Here, goods are sold on credit to a solvent buyer and the seller gets the invoices accepted for payment from the buyer, usually within 90-120 days. The factor then discounts the invoices to pay the seller of the goods. On due date, the factor collects the entire payment (due to seller) from the buyer of goods.

The factoring business, which had shrunk by half in 2009, is growing again due to increased production and better cash flows.

"Cash-flow financing frees the muchneeded working capital, it provides credit protection for the receivables and helps the business to meet increasing sales demand and expand production," said Ravi Gupta, managing director, Blend Financial Services.

According to officials with factoring firms, capital raised through factoring has gone up from Rs 9,690 crore in 2003 to 11,940 crore in 2005 and 30,330 crore and 31,200 crore in 2007 and 2008 respectively. Capital raised through factoring fell in 2009 to Rs 15,900 crore but recovered in 2010 following an uptick in production. If one goes by estimates, companies will raise about 15% more funds through factoring this year.

According to Gupta, factoring helps companies save time as it is the factor that works to collect money from the counter-party. It is an option that can substitute debt financing significantly, he added. As per Prime Database, there has been over 690 debt issuances aggregating to 1,84,000 crore since January this year. India's share in the Asian factoring market is only 2.2%. The lower volumes, among other things, can be attributed to the large share of agriculture and services in the economy. Globally, factoring business grew at a CAGR of 15% in 2005-09 vis-à-vis 7.4% in India during the same period.

"Large companies also benefit from cashflow financing as it is less cumbersome and the processes are faster compared to bank finance. It (factoring) is a good option to turn around big and fundamentally good businesses, that finds difficult to work within the constraints of their bank covenants," said Rajesh Agrawal, vice-president (debt capital markets), Money Matters Financial Services.