Export Factoring: A Bridge Too Far?

Factoring as a tool of obtaining quick access to short-term export financing and mitigating risks related to payment delays and defaults by overseas buyers is gaining traction the world over. Countries like Brazil, China, Germany and Taiwan have leveraged factoring to grow their exports. Despite the many advantages of factoring and a growing demand for exports credit among Indian MSMEs, factors like lack of awareness, a perception of high interest rates and cumbersome documentation processes, have prevented the growth of factoring services in India. To bring matters into perspective, less than a percentage point of India's exports are backed by factoring services. However, factors are optimistic about the future and are taking steps to raise awareness about their services amongst the Indian foreign trade community. Will factoring finally gain acceptance in India? The Dollar Business investigates the curious case of India's factoring industry.

A manufacturer of cotton t-shirts, Dinesh Chau-han of Delhi-based N. R. Traders, was in the final stages of negotiation to procure a sizeable order of t-shirts from Italy. A small manufacturer Chauhan was unable to raise the funds that would be required to fulfill the order and lost out on the opportunity to leap into the big league of t-shirt exporters. Had it been any other country, Chauhan would have thought of export factoring as a way to raise this short-term finance. But sadly, for both Chauhan and for India, he had no idea that this option even existed. [Of course, we've told him already!]

If you talk to export firms in India, be it large or small, about export factoring, it is more than likely that they will either be unaware of export factoring as a means of finance, or if by chance they do have a clue, they will be amongst those apprehensive about the process and expenses incurred to avail it. By the factoring industry's own estimates, only about 30-35% of Indian exporters are aware of export factoring. It is not that exporters in India do not avail export financing – the fact remains that they are very much in need of services that a factor can provide – but their awareness about the benefits of factoring remains low. According to the ICC (International Chamber of Commerce) Trade and Finance report 2016, up to 80% of global trade is supported by some sort of credit finance. For any industry, whether it is an MSME-intensive or a large-scale one, banks have been the traditional means for raising capital against collateral or some type of asset. Having said that, many small companies are unable to raise the needed capital because of a lack of assets. In such a situation, factoring has supported many exporters across the globe with a financing solution. However, factoring has not yet gained acceptance in India in the way it has in other major exporting nations like China, France, Italy and Germany.