Role of Factoring in Financing SMEs in India

Factoring is one of the upcoming sources of finance for SMEs in India. It is particularly, relevant if a company is growing on a daily basis and when new customers are added regularly there are chances of ending up with huge invoices. The notion that SMEs experience disadvantage in relationship with the capital market i.e. the existence of credit rationing and also finance gaps in their relationship with banking institutions have been popular for decades. This problem often directs many businesses to look for alternative source of finance like factoring. The study shows that the demand for factoring services will tend to reflect the impact of acute cash shortage due to delayed payment by debtors causing liquidity problems. From the research it is also evident that SMEs use these services during their start-up and growth stage, since this is the stage were organisations find it difficult to raise finance due to lack of financial data about its performance history. Even though the service providers of factoring charge 10%-15% of the receivables as their commission still there are organisations that prefer factoring services. Key Words: Factoring, SMEs