121 Finance Founder Reveals How Factoring Can Solve Working Capital Challenges Facing MSMEs

In business, cash is king. Smooth cash flow ensures efficient working capital management.

But managing working capital is one of the biggest challenges facing the micro, small and medium enterprise (MSME) sector due to late payments, stranded inventory, debts, etc.

There are 6.33 billion MSMEs in India, of which 6.30 crore include micro-enterprises that are not financially stable. To survive, these businesses often take out loans and credits from unorganized lenders who charge higher interest rates.

Resorting to long-term loans to meet short-term business needs puts these companies in financial difficulty. And although the government has announced various programs and benefits to help MSMEs, the lack of awareness still persists.

This is where factoring comes in – it can help ensure regular working capital for running the business. This is a way for businesses to finance their cash flow by selling their invoices to a third party (a factor or a factoring company) at a reduced price.

Recently, the Government of India amended the Factoring Regulation Act 2011 (“the Act”), which broadens the scope of companies that can engage in factoring business.

121 Financea Jaipur-based non-banking financial company (NBFC), has become India’s first NBFC factor (after RBI regulation of January 2022) and is on a mission to bring factoring, which was only until presently available only to businesses, MSMEs.

In an interaction with SMBStory, Dr. Ravi Modani, Founder and CEO of 121 Finance, talks at length about the benefits of factoring and how it can help MSMEs out of the working capital crisis. He says that with the RBI being the governing body, all transactions are legalized and regulated.

“Until now, in India, factoring was only practiced for companies. We focus on MSMEs that need to streamline their working capital and needs to keep growing. »

121 Finance, based in Jaipur, is the first NBFC factor in India

Edited excerpts from the interview:

SMBStory [SMBS]: How does 121 Finance help MSMEs solve their working capital/cash flow issues?

Ravi Modani [RM]: We provide factoring services to MSMEs, which simply means that any MSME seller of goods or services can sell their invoices to us and get cash immediately instead of waiting for standard payment. 30-120 credit days period.

It contributes to faster turnaround and more business cycles, and requires no collateral.

SMEs: What was the inspiration behind starting 121 Finance?

RM: My PhD focused on working capital management, followed by three decades of experience with various companies around the world. Meanwhile, the thing that stands out the most is problematic working capital management. In all of finance, good or bad, working capital management has proven to make or break businesses.

Most businesses fail due to mismanagement of their short and long term funds. This is the key factor that prompted me to create 121 Finance, with the aim of supporting companies in managing their working capital.

SMEs: When did you receive a factoring license and how does it help MSMEs?

RM: We received a factoring license in April 2022. This is a certificate of registration issued by RBI under the Factors (Reserve Bank) Registration Regulations 2022announced in January 2022.

Since the governing body is the RBI, all transactions are legalized and regulated. Until now, in India, factoring was practiced only for companies; we focus on MSMEs that need to streamline their working capital and needs to keep growing.

Factoring can be risk free. It has options like collections and debt management services. As everything is digital, it is secure, fast and leaves very little room for error.

Other credit options are mostly based on loans with issues such as collateral requirement, long waiting periods, loan non-approval issues based on history or newness of loan. company. It could also be for one-time billing as opposed to one-time loan funding.

Factoring is for a shorter term of 15-120 daysagainst loans of at least 18 months.

The only challenge is that people are unaware of factoring. If they know, they don’t know that we can now do factoring for MSMEs.

SMEs: What other services does 121 Finance provide and what is the way forward?

RM: We are present on the government Online Marketplace (GeM) Sahay, which offers short-term credit offers to entrepreneurs for their purchases on the portal. We are in the lead with more than 50% of transactions carried out through us.

We are present on all three TReDS platforms, including InvoiceMart, M1xchangeand RXIL, as a financier. We also provide personalized integrated financing to entrepreneurs.

We are the only one providing factoring services to MSMEs in India. We are targeting a disbursement of Rs 500 crore in this financial year.

Edited by Teja Lele Desai

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