Factoring & receivables finance

Selling the receivable, not borrowing against it

Factoring is often described as a form of discounting, and the shorthand obscures a real legal difference. In factoring, you assign your receivables to a factor. The factor becomes entitled to collect them. It is a transfer of the debt, not a loan secured on it.

That distinction drives everything else about how factoring behaves. Because the receivable is assigned rather than pledged, a properly structured non-recourse arrangement can take the debt off your balance sheet. Because the factor now owns the collection right, they typically run the sales ledger and chase payment themselves. And because it is a relationship over your whole debtor book rather than a decision on one bill, it is continuous rather than transactional.

In India the activity is governed by the Factoring Regulation Act, 2011, amended in 2021 to widen materially the set of non-banking financial companies permitted to undertake factoring and to streamline the registration of assigned receivables. The amendment was aimed squarely at improving MSME access, and it meaningfully increased the number of institutions active in this space.

Recourse and non-recourse

This is the choice that determines both the price and the accounting.

With recourse, the factor advances against the invoices but can come back to you if the buyer does not pay. It costs less. The receivable stays on your books, because you have not genuinely transferred the risk.

Without recourse, the factor absorbs buyer default within agreed credit limits on each debtor. It costs more, and the additional cost is essentially a credit insurance premium. Depending on how completely risks and rewards have transferred, the receivable may be derecognised — which improves your reported working capital position and your debtor days. Whether derecognition is appropriate is an accounting judgement under the applicable standards and belongs with your auditor, not with the factor's sales brochure.

Note also that non-recourse protects you against your buyer's inability to pay. It does not protect you against their unwillingness where there is a commercial dispute about the goods or services. Disputed invoices come back to you under every structure.

Disclosed or undisclosed

In disclosed factoring the buyer is notified of the assignment and pays the factor directly. This is the standard arrangement and it is operationally cleaner.

In undisclosed factoring the buyer continues to deal with and pay you, and you remit onward. Suppliers choose it when they are concerned that notification signals financial weakness to a major customer. That concern is less justified than it once was — receivables finance is now ordinary practice rather than a distress signal — but it remains a genuine relationship consideration in some sectors. Undisclosed facilities are offered more selectively and priced accordingly.

Factoring, discounting or a working capital limit?

• Choose invoice or bill discounting when you need occasional, transaction-specific liquidity and want to keep control of your debtor relationships. See invoice and bill discounting.
• Choose factoring when the receivables book is a continuing burden — many debtors, no credit control function, collections eating management time, or a genuine need to transfer buyer credit risk.
• Choose a working capital limit when the requirement is a general operating buffer rather than specifically receivables, and you have the security and the banking track record to support it. See working capital loans.
• Consider reverse factoring if your large buyer already runs a supply chain finance programme. Pricing follows their credit, which for most suppliers is the cheapest option on the table, and it requires nothing from your balance sheet.

What to establish before signing

Factoring agreements are more involved than a discounting facility, because they govern an ongoing relationship over your whole debtor book. Read for: the debtor-wise credit limits the factor will set and how they can be revised; the advance percentage and how the reserve is released; whether the facility is whole-turnover or selective, since whole-turnover agreements oblige you to assign everything; minimum volume commitments and the charges if you fall short; the notice period and what happens to outstanding receivables on termination; and how disputes and credit notes are handled.

Also confirm how it interacts with any existing charge your bank holds over book debts. The same receivable cannot be assigned to a factor and hypothecated to a bank without that being resolved formally.

How Rytvae helps

We assess whether your receivables profile actually suits factoring — for many businesses discounting or a properly sized limit is the better answer — and arrange facilities through our partners. See also export finance and LC discounting.

Frequently asked questions