Factoring
Factoring is a trade finance arrangement in which a business sells its accounts receivable (invoices) to a third party called a factor at a discount, receiving immediate liquidity while the factor collects the full receivable amount from the buyer — with the Factoring Regulation Act, 2011 and its 2021 amendment providing the Indian legal framework.
Factoring addressed a fundamental mismatch in trade finance: sellers needed payment quickly to fund their operations, while buyers preferred to delay payment to conserve their own working capital. Rather than resolving this tension through credit, factoring resolved it through the sale of a financial asset — the receivable itself — to a specialised intermediary who could hold the credit risk and collect the payment at maturity.
The Factoring Regulation Act, 2011 was India's first dedicated legislative framework for factoring, providing definitions, registration requirements, and priority of claims. The Act was amended significantly in 2021 to expand the scope of eligible factors to include NBFC-Factors, all NBFCs registered with RBI, and banks, while removing the restriction that limited factoring to entities specifically registered as factors. This amendment materially increased the number of entities legally empowered to provide factoring services in India and enabled TReDS platforms to operate factoring transactions within a clear legal framework.
In factoring terminology, the seller of the receivable was the Client, the buyer who owed the invoice was the Debtor, and the purchasing intermediary was the Factor. There were two primary variants. In recourse factoring, the factor had the right to demand repayment from the client if the debtor failed to pay — effectively, the credit risk remained with the seller, and the factor was providing a liquidity advance rather than purchasing an unqualified credit asset. In non-recourse factoring, the factor purchased the receivable outright, absorbing the credit risk of debtor non-payment. Non-recourse factoring was more expensive (as the factor priced the credit risk) but was cleaner from the seller's balance sheet perspective as the receivable was fully derecognised.
The cost of factoring comprised the discount rate (the financing cost equivalent) and the service fee (for credit management, collections, and administration). The effective annual cost depended on the invoice tenor and the rates negotiated, but well-rated buyer receivables could be factored at costs competitive with working capital loans, particularly when the factor relied on the buyer's credit rather than the seller's.
Export factoring was a significant segment, supported by the Export Credit Guarantee Corporation (ECGC), which provided insurance against foreign buyer default. India Factoring and Finance Solutions (now part of FIM Bank Group) and several bank-sponsored factoring arms had developed export factoring capabilities. SIDBI's role in providing refinance lines to smaller factors expanded the reach of factoring to MSME exporters who could not directly access international capital markets.