121 Finance founder reveals how factoring can solve the working capital problems MSMEs face

In business, cash is king. A smooth flow of cash ensures efficient management of working capital. 

But, working capital management is one of the biggest challenges that the micro, small, and medium enterprises (MSME) sector face on account of delayed payments, stuck inventory, debts, etc. 

There are 6.33 crore MSMEs in India, of which 6.30 crore comprise micro-enterprises that are not financially stable. To survive, these enterprises often take loans and credit from unorganised lenders who charge higher interest rates.

Availing long-term loans to meet short-term business needs puts these enterprises in financial trouble. And though the government has announced various schemes and benefits to help MSMEs, the lack of awareness persists. 

This is where factoring comes in—it can help ensure smooth working capital for running the business. This is a way for businesses to fund cash flow by selling their invoices to a third party (a factor, or factoring company) at a discount. 

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

121 Finance, a Jaipur-based Non-Banking Financial Company (NBFC), became India’s first NBFC-Factor (after RBI’s January 2022 regulation) and is on a mission to bring factoring, which was only available to corporates so far, to MSMEs. 

In an interaction with SMBStory, Dr Ravi Modani, Founder and CEO of 121 Finance, talks at length about the advantages of factoring and how it can help MSMEs emerge from the crisis of working capital management. He says that as the RBI is the governing body, all transactions are legalised and regulated.

“So far, in India, factoring was only done for corporates. We focus on MSMEs who need to streamline their working capital and requirements to keep growing.” 

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Edited excerpts from the interview:

SMBStory [SMBS]: How is 121 Finance helping MSMEs solve their working capital/cash problems?

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

It helps with faster rotation and more business cycles, and comes without the requirement of any collateral.

SMBS: What was the inspiration behind starting 121 Finance?

RM: My PhD was focused on working capital management, followed by a three-decade-long experience with various businesses across the globe. During this time, the one thing that stood out most was the problematic management of working capital. In the entire financial domain, good or bad, working capital management has proven to make or break businesses. 

Most businesses fail due to the mismanagement of their short-term and long-term funds. This was the key factor that drove me to start 121 Finance, with the focus on supporting businesses with their working capital management.

SMBS: When did you receive a factoring licence and how does it help MSMEs?

RM: We received a factoring licence in April 2022. It is a Certificate of Registration issued by the RBI under the Registration of Factors (Reserve Bank) Regulations, 2022, announced in January 2022. 

Since the governing body is the RBI, all transactions are legalised and regulated. So far, in India, factoring was only done for corporates; we are focused on MSMEs who need to streamline their working capital and requirements to keep growing.

Factoring can be risk-free. It has options like collections and receivable management services. Since it’s all digital, it’s secure, quick, and has very little room for error. 

Other credit options are mostly loan based with issues like requirement of collateral, long waiting periods, issues with non-approval of loans based on business history or newness. This could also be for a single invoice as against only ad hoc financing in loans. 

Factoring is for a shorter duration of 15-120 days, as against loans of at least 18 months.

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

SMBS: What are the other services 121 Finance provides and what is the way ahead?

RM: We are present on government eMarketplace (GeM) Sahay, which provides short-term credit offers to entrepreneurs for their purchases on the portal. We are leading with—over 50 percent of transactions done via us. 

We are present on all three TReDS platforms, including InvoiceMart, M1xchange, and RXIL, as a financier. We also provide customised embedded finance to entrepreneurs.

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