Explained | What is Factoring Regulation (Amendment) Bill, 2020?

The new law is expected to improve the availability of credit to MSMEs

The Parliament this week passed into law the Factoring Regulation (Amendment) Bill, 2020, which is an amended version of the Factoring Regulation Act, 2011. The new law is expected to improve the availability of credit to micro, small and medium scale enterprises (MSMEs) since more non-banking financial companies (NBFCs) will now be eligible to offer factoring services to MSMEs. Factoring is an arrangement where a business sells its receivables (outstanding bills of sale against which it is yet to collect cash) to an interested buyer. The buyer who purchases the receivables from the business later collects cash from the party that owes these bills. The buyer makes a profit in the process since he usually purchases the outstanding receivables at a discounted price from the seller. So, for example, a business may have sold goods worth ₹1 lakh to a third party and may expect the outstanding amount to be paid within six months. Its capital, however, will be stuck in the business until it receives cash from the third party. So the business may decide to sell the receivable worth ₹1 lakh to a buyer at a discounted price of ₹90,000. The buyer of the receivable in this case can make a profit of ₹10,000 if he manages to collect the entire receivable amount of ₹1 lakh from the third party.