After operating as a B2B working capital and trade finance company for seven years, 121 Finance got its factoring licence in April 2022, making it the first entity to become an NBFC factor under the new regulatory guidelines.

“This has enhanced a lot of avenues, which we weren’t even thinking about, have opened up. One of the biggest avenues and use case for working capital is the service industry, and this has become a huge opportunity,” Founder and CEO Ravi Modani told BusinessLine. “This is due to the shorter business or cash cycles in the service industry, and the lower risk profile.”

121 Finance is in the process of raising equity, on the back of which it expects to grow two-fold in FY23. “We’re going to raise money and we have the factoring licence. We’re live on all the TReDs exchanges as well. We believe this is an advantage we have, so we have to move fast and at the right time,” Modani said.

Edited excerpts from the interview:


Has the business model shifted after getting the factoring licence?

121 Finance has been focussed on B2B working capital, and we specialise in trade finance since we started in 2015. We enter once the trade or transaction is done, catering to the working capital gap in the market.

The corporate end of working capital finance is structured and they have multiple credit facilities but that does not cascade down to MSMEs. We are more focussed on SMEs in the organised set up, wherein the typical borrowers are vendors or customers to large corporates or government agencies. They are part of the supply chain ecosystem, such as government contractors, logistic transporters, and other service providers.


What opportunities do you see in the market as an NBFC factor?

The first movers that came to us when we started factoring was the service industry. We never realised this untapped opportunity, especially in areas such as manpower, transportation, logistic or any recurring services. Even in IT, there are some use cases for monthly services.

Anything which is erratic for working capital, or seasonal and cyclical is an opportunity. In factoring, the right to take a call on the receivable opens up a security, which is huge and we are exploring use cases there. Service industry and MSMEs are two segments where we see huge opportunity.


How many MSMEs have you tied-up with and is there a geographic preference?

We have worked with more than 2,500 MSMEs across the country. We are a part of the government’s Gem Sahay portal, where we have disbursed over 1,100 loans. We have also partnered with SIDBI, which is coming out with its own GST Sahay platform. We are one of only three companies selected to go live on the platform.

There is demand from the most remote parts of the country because the government portal has allowed access to a formal structure of doing business. However, Western India constitutes a larger part of economic activity. So our focus is also typically in Gujarat, Rajasthan, Maharashtra and Karnataka, also because the service industry in concentrated in these parts.


What are the underwriting parameters that you focus on?

The genesis of factoring is that there are three parties involved--the buyer, seller and financier. In our philosophy and underwriting, we look for trilateral lending, where at least one of the parties is very strong. So it depends on who is stronger and how the transaction has been structured.   Cash flows are predictable because we enter post the transaction. So, we do post transaction collection tracking and take a call based on the repayment track record. It is need-based financing so there might be delays but there’s no default. Our overdues are miniscule and that too on the MSME part, not in the corporate segment.


What is the average ticket size and tenure of your loans?

The smallest transaction is 27 rupees of invoice, this is because when we do factoring for a seller, we factor all the transactions. The average ticket size is ₹25,000-27,000 for the lower end MSMEs and about ₹8-9 lakhs for SMEs. In terms of tenure, the average ticket on the lower side is 21-30 days and on the higher end is 60-90 days.


How much of the business is originated directly and through the TReDS exchanges?

We recently went live on the TReDS exchanges so we have hardly done any business through them till now.

We are focussed on MSMEs so instead most of our lending so far has been through partnerships and alliances. We run a program for Ashok Leyland’s distributors across the country. We are also in talks with three e-commerce B2B platforms, where we are getting embedded as a financier. It is about annuity as well. Once you set up the business, it goes on and we have retained 100 per cent of the customers that have been with us since 2015.