What is Factoring?
Factoring is a financial transaction where a business sells its accounts receivable (invoices) to a third party (called a factor) at a discount. Unlike invoice discounting which is primarily a financing arrangement, factoring is a comprehensive service that includes financing, collection management, sales ledger administration, credit protection, and sometimes advisory services.
In India, factoring is regulated by the Factoring Regulation Act, 2011 and RBI regulations. The sector has seen significant growth as businesses seek comprehensive receivables management solutions rather than just financing.
How Factoring Works
- Agreement: Business signs a factoring agreement with a factor, typically for 12 months or more
- Credit Approval: Factor approves credit limits on buyers based on their creditworthiness
- Invoice Sale: Business sells invoices to the factor as and when raised
- Advance: Factor pays advance (typically 80-90% of invoice value) immediately
- Sales Ledger Management: Factor maintains the sales ledger and sends statements to buyers
- Collection: Factor collects payment from buyers on due dates
- Final Payment: Factor pays the balance (minus charges) to the business
Types of Factoring
By Risk Allocation
- Recourse Factoring: Factor can claim refund from seller if buyer defaults. Most common in India. Lower service fees.
- Non-Recourse Factoring: Factor absorbs default risk (if buyer becomes insolvent). Higher charges. Factor typically purchases credit insurance.
By Notification
- Disclosed/Notification Factoring: Debtor is informed of the assignment. Payment made directly to factor. Most common in India.
- Undisclosed/Confidential Factoring: Debtor not informed. Seller collects and remits to factor. Rare in India due to regulatory requirements.
By Advance
- Advance Factoring: Immediate cash up to 80-90% of invoice value. Most popular option.
- Maturity Factoring: No advance payment. Factor pays on due date. Only collection and ledger services.
By Geography
- Domestic Factoring: Within India. Single factor model.
- International Factoring: Cross-border transactions. Two-factor model (export and import factors).
Specialized Factoring Types
Bulk Factoring
All invoices to specific buyers are factored. Suitable for businesses with concentrated customer base.
Selective Factoring
Business chooses specific invoices or buyers to factor. More flexible but may have higher per-invoice costs.
Construction Factoring
Specialized factoring for construction industry with milestone-based payments and retention money considerations.
Factoring Process
Initial Setup
Submit application with business details, financials, buyer list, and projected invoice volumes. Factor conducts due diligence.
Agreement Execution
Sign factoring agreement defining terms, fees, advance rates, recourse provisions, and minimum volume commitments.
Credit Approval
Factor approves credit limits on each buyer based on their credit assessment. This determines maximum funding available.
Invoice Assignment
Submit invoices with proof of delivery. Factor verifies and accepts assignment of receivables.
Funding
Receive advance (typically 80-90%) within 24-48 hours of invoice submission.
Collection & Settlement
Factor manages collection. Upon receipt, balance is paid to seller after deducting charges.
Parties Involved in Factoring
Seller (Client)
The business that sells goods/services and assigns its receivables to the factor. Receives immediate cash and outsourced collection services.
Factor
The financial institution (NBFC-Factor) that purchases receivables, provides advance funding, and manages collections. Regulated by RBI.
Debtor (Buyer)
The customer who owes payment on the invoice. Their creditworthiness determines the factoring terms and approval.
In International Factoring (Two-Factor Model)
Export Factor
Located in seller's country. Provides advance financing and manages relationship with exporter.
Import Factor
Located in buyer's country. Assesses buyer credit risk and handles collection in local currency.
Factoring Charges
| Charge Component | Typical Range | Description |
|---|---|---|
| Service Fee/Commission | 0.5% - 2% of invoice value | For collection and administration services |
| Discount/Interest | 12% - 18% per annum | On advance amount from date of advance to collection |
| Credit Protection Fee | 0.5% - 1% | For non-recourse factoring (insurance cost) |
| Setup Fee | ₹10,000 - ₹50,000 | One-time documentation and onboarding |
| Annual Fee | ₹5,000 - ₹25,000 | Account maintenance and administration |
Cost Calculation Example
Invoice Value: ₹10,00,000
Advance: 90% (₹9,00,000)
Credit Period: 60 days
Service Fee @ 1%: ₹10,000
Discount @ 15% p.a.: ₹9,00,000 × 15% × 60/365 = ₹22,192
Total Cost: ₹32,192
Amount Received Initially: ₹8,67,808
Balance on Collection: ₹1,00,000 - ₹32,192 = ₹67,808
RBI Regulation of Factoring
Factoring Regulation Act, 2011
The Act provides the legal framework for factoring in India, defining factoring business, registration requirements, and prohibiting unregistered entities from conducting factoring business.
RBI Requirements for NBFC-Factors
Net Owned Funds
Minimum ₹5 crore (₹1 crore for existing NBFCs before 2012). Ensures financial stability of the factor.
Principal Business Criteria
At least 50% of income must come from factoring business. At least 75% of financial assets must be factoring-related.
Registration
Must obtain Certificate of Registration from RBI. Annual returns and compliance reporting required.
CERSAI Registration
Assignment of receivables must be registered with Central Registry (CERSAI) to protect against multiple financing.
Fair Practices Code
- • Transparent disclosure of all charges and fees
- • Grievance redressal mechanism for clients
- • Reasonable notice period for termination
- • Confidentiality of client information
- • No charging of hidden fees
Benefits & Limitations
Benefits
- ✓ Immediate cash flow improvement
- ✓ Outsourced collections—saves time and resources
- ✓ Professional sales ledger management
- ✓ Credit protection (in non-recourse)
- ✓ No additional collateral required
- ✓ Flexible financing linked to sales
- ✓ Better buyer credit assessment by factor
- ✓ Allows focus on core business
Limitations
- ✗ Higher cost than traditional bank financing
- ✗ Usually disclosed—buyer knows about factoring
- ✗ Not suitable for disputed invoices
- ✗ Minimum volume commitments may apply
- ✗ Credit limits can be reduced suddenly
- ✗ Long-term contract lock-in possible
- ✗ Small invoices may not be economical
Factoring vs Invoice Discounting
| Aspect | Factoring | Invoice Discounting |
|---|---|---|
| Nature | Sale of receivables | Loan against receivables |
| Services | Finance + Collection + Ledger + Credit Protection | Finance only |
| Notification | Usually disclosed | Can be confidential |
| Ledger Management | Factor maintains | Seller maintains |
| Collection | Factor handles | Seller or financier |
| Cost | Higher (full service) | Lower (financing only) |
| Suitable For | Businesses wanting outsourced receivables management | Businesses wanting to maintain customer relationships |
NBFC Factors in India
SBI Factors and Commercial Services
Joint venture of SBI and SIDBI. Largest factoring company in India.
- • Full range of domestic and international factoring
- • Strong buyer credit assessment
- • Pan-India presence
Canbank Factors Ltd
Subsidiary of Canara Bank (erstwhile Syndicate Bank).
- • Strong presence in South India
- • Competitive rates for existing Canara Bank customers
- • Focus on MSME sector
PNB Factors Ltd
Punjab National Bank subsidiary.
- • Strong presence in North India
- • Integrated with PNB banking services
- • Special schemes for SME clients
India Factoring & Finance Solutions
Part of FIMBank Group (Malta). International factoring expertise.
- • Strong in export factoring
- • FCI network membership
- • Multi-currency capabilities
How to Choose a Factoring Company
- Regulatory Status: Verify RBI registration as NBFC-Factor
- Industry Expertise: Experience in your specific industry sector
- Financial Strength: Net owned funds and capital adequacy
- Cost Structure: Compare all-in costs including hidden charges
- Service Quality: Speed of onboarding, responsiveness, technology
- Contract Terms: Lock-in period, minimum volumes, exit clauses