According to Bhriguraj Singh, senior vice president and head factoring, the tie-up is not only due to a better pricing quote but also owing to its long-standing relationship with HSBC.

HSBC buys credit insurance protection on behalf of its factoring services clients. Till now, the bank was offering factoring services only to big corporates. It has now extended the product to small and the medium enterprises (SME) segment.

Factoring is nothing but working capital financing but against receivables. The service also includes managing collections and credit protection through insurance. HSBC-the factor- offers its factoring services to SMEs by lending against its client invoices manage the collections and take protection against buyer's default/insolvency.

According to Singh, HSBC lends 85 per cent of the invoice value to its factoring service clients. "In the case of traditional working capital finance, the loan is based on the previous year's performance. It does not take into account demand seasonality. Factoring is flexible and permits clients to modify their funding requirements. It does not require any collateral security."

Under HSBC's scheme, a profitable and a positive networth SME with a turnover of over Rs5 crore can avail the factoring services. On being eligible, a SME can raise 85 per cent of its invoice value as loan from the bank.

"In the case of SMEs it is normally the CEO or the marketing executive who follows up the collections. Owing to business reasons they may not be able to realise the money on the due date. But a professional intermediary-a factor- is more effective."

The other advantage of a bank following up with the buyer is that, the later are prompt in making the payment on the due date to be out of the defaulters list. On the receipt of the amount from the buyer, HSBC adjusts its dues and pays its client the excess money.

With overseas buyers favouring open account sale instead of letter of credit based transactions, factoring helps a domestic seller to unlock value fast.

Offering the factoring services, HSBC earns interest on the money lent and also a fee for managing the collection. The cost to the borrower including the credit insurance comes to around 10.5 per cent. The interest is calculated on daily balances and charged on monthly basis.

According to Singh, the bank would offer the factoring services to domestic as well as export sales. Currently the service is available in Mumbai, New Delhi, Kolkata, Pune, Bangalore and Chennai.