Trade Receivables Financing: Tale of 3 Modalities

Dayita Kanodia |

Trade receivables form part of an important part of working capital, and given the increasing trend toward the provision of buyers’ credit, occupying an ever-increasing part thereof. Traditionally, it is funded by usual modes of working capital funding. However, businesses have been searching for alternative modes of receivables financing. 

This article discusses and compares three prominent alternative modes of working capital finance, namely – Factoring, Bill discounting and Loan against invoice.

1. Factoring


Factoring involves selling a company’s accounts receivable to a third party, known as a factor, at a discount. The factor then assumes the responsibility of collecting the receivables from the company’s customers. Factoring can be done on a recourse or non-recourse basis. In recourse factoring, the company retains the risk of bad debts, while in non-recourse factoring, the factor assumes this risk.

Legal Framework in India

The Factoring Regulation Act, 2011 governs the factoring business in India. This Act aims to regulate factoring services, provide for the registration of factors, and protect the interests of small businesses. 


  • Immediate Cash Flow: Factoring provides immediate access to cash, improving liquidity and enabling businesses to meet their short-term obligations.
  • Outsourced Collection: The factor handles the collection process, saving the company time and resources.
  • Credit Risk Management: In non-recourse factoring, the factor bears the risk of non-payment, protecting the business from bad debts.


  • Cost: Factoring can be expensive, with fees often higher than traditional financing options.
  • Customer Relations: Some customers may prefer dealing directly with the business rather than a third party for payments.

2. Bill Discounting


Bill discounting, also known as invoice discounting, involves selling a bill of exchange to a financial institution at a discount. The financial institution advances the cash to the company, typically a percentage of the bill value, and collects the full amount from the customer when the invoice is due.

Legal Framework in India

Bill discounting is primarily governed by the Negotiable Instruments Act, 1881. This Act defines and regulates bills of exchange, promissory notes, and cheques:

  • Negotiable Instruments: Bills of exchange are considered negotiable instruments, meaning they can be transferred from one party to another.
  • Endorsement and Delivery: The process of discounting involves the endorsement and delivery of the bill to the financial institution.


  • Quick Access to Funds: Like factoring, bill discounting provides quick access to cash.
  • Retention of Control: The company retains control over its sales ledger and customer relationships, as the customer is usually unaware of the discounting arrangement.
  • Flexibility: Bill discounting can be used as needed, allowing businesses to finance specific invoices rather than their entire receivables portfolio.


  • Credit Risk: The business retains the risk of non-payment by the customer.
  • Cost: While typically less expensive than factoring, bill discounting still incurs fees and interest costs.

3. Loan Against Invoice


A loan against invoice involves using outstanding invoices as collateral to secure a loan from a financial institution. The lender provides a loan based on a percentage of the invoice value, and the company repays the loan once the customer settles the invoice.

Legal Framework in India

Loans against invoices are like any other secured loan and are therefore governed by the RBI Regulations applicable to the financial institution. 


  • Collateral Utilization: Businesses can leverage their receivables to secure financing, which can be particularly useful for companies with limited tangible assets.
  • Maintained Customer Relations: The business continues to handle its customer interactions, maintaining its relationships.
  • Flexible Financing: Loans against invoices can be tailored to the specific financing needs of the business, offering flexibility in terms of loan amount and duration.


  • Credit Risk: The business is responsible for repaying the loan regardless of whether the customer pays the invoice.

Refinancing by financial institutions

Receivables acquired as a part of the factoring business.

As discussed above, a financial institution registered as a factor with RBI can purchase the accounts receivables of a business and advance money against it. However, the question which arises is whether this financial institution who has accepted the receivables can subsequently transfer the same to another financial institution ? 

Under the Transfer of Loan Exposure Directions of RBI (‘TLE Directions’), receivables acquired as a part of factoring business can be transferred to another financial institution. 

MHP Requirements

The TLE Directions mandate a Minimum Holding Period (MHP) requirement during which loans should stay in the books of the originating financial institution. The MHP requirements for loan tenors of 2 years and less is 3 months. Considering trade receivables have a very short tenor, it will not be possible for factors to fulfill the MHP requirements. 

Accordingly, the TLE Directions provide an exemption from the MHP requirements for receivables acquired as a part of factoring business. 

Para 39 of the TLE Directions provide that, 

“Provided further that the transfer of receivables, acquired as part of ‘factoring business’ as defined under the Factoring Regulation Act, 2011, will be exempted from the above specified MHP requirement subject to fulfilment of following conditions:

  1. The residual maturity of such receivables, at the time of transfer, should not be more than 90 days, and
  2. As specified under clauses 10 and 35 of these directions, the transferee conducts proper credit appraisal of the drawee of the bill, before acquiring such receivables”

Can bills discounted be subsequently transferred by the financial institution ?

Financial institutions which had discounted bills of exchange for their customers may subsequently transfer the same. However this transfer will be effected under the Negotiable Instruments Act, and will not fall within the purview of the TLE Directions. 

Loan against Invoice

Loan against invoice is similar to any secured loan advanced by a financial institution and will therefore be governed by the TLE Directions in a similar manner. 

Are trade receivables discounted/purchased from the borrowers eligible for securitisation ?

In terms of para 6 of the Securitisation of Standard Assets Directions (‘SSA Directions’), trade receivables with tenor upto 12 months purchased by lenders from their borrowers will be eligible for securitisation provided the drawee of the bill has fully repaid the entire amount of last two loans/receivables within 90 days of the due date.

Loan against invoice will be securitised in the same manner as that of any secured loan. 


Trade receivables financing in India, through methods such as factoring, bill discounting, and loans against invoices, offers businesses valuable tools to manage cash flow and liquidity. The regulatory frameworks provided by the Factoring Regulation Act, 2011, the Negotiable Instruments Act, 1881, and RBI guidelines ensure a structured and secure environment for these financial transactions. Further, lenders after advancing cash to businesses against invoices can transfer or even securitise the same.

Transfer of factoring receivables exempted from MHP 

Qasim Saif |

What is the exemption provided by the RBI?

  • The Reserve Bank of India (RBI) on 28th December, 2023 issued a circular amending the Master Direction on Transfer of Loan Exposures (MD-TLE) to exempt the Minimum Holding Period (MHP) requirement in case of transfer of receivables arising from factoring business.
  • The circular further prescribes eligibility for exemption, providing that:
    • The residual maturity of the receivables at the time of transfer should not exceed 90 days; and 
    • Proper credit appraisal of the drawee should have been conducted by the transferee as provided under clause 10 and 35 of MD-TLE
  • It shall further be noted that, factoring business, can only be undertaken by eligible regulated entities, hence the transferee’s in case of transfer of factoring receivables can be only be entities eligible for factoring business which are:
    • NBFC-Factors 
    • NBFC-ICC having specific licence for carrying out factoring business; and 
    • Entities identified under section 5 of the Factoring Regulation Act, 2011, viz. banks, and body corporates established under an Act of Parliament or State Legislature, or a Government Company
  • Before the specific amendment, a view could have been taken that factoring of receivables not being a loan, did not fall within the ambit of MD-TLE. The amendment has in a way clarified two things:
    • Transfer of factoring receivables shall be covered under the MD-TLE; 
    • The MHP requirement shall not be applicable in case the residual maturity of receivables is less than 90 days.
    • In case the residual maturity is more than 90 days, the MHP shall be applicable along with all other provisions of the MD-TLE

Intent behind exemption from Minimum Holding Period requirement

  • In accordance with MD-TLE any transfer of economic interest in a loan account/pool by regulated entities could only be undertaken after a prescribed period of 3 months in case of loans with tenure less than 2 years and 6 months in case of other loans has elapsed. The intent being to restrict REs from originating loans with the sole intent to transfer the same.
  • The primary intent behind this amendment is to foster and enhance the secondary market operations associated with receivables acquired through ‘factoring business’. By exempting the MHP requirement for eligible transferors, RBI aims to encourage greater liquidity within the factoring industry.

Anticipated impact of the amendment

  • Promoting an active secondary market would attract more participants, specifically the secondary market would help REs to work on their core competencies, such as eligible NBFCs may be able to originate assets in their specific niche which can be then transferred to banks or other large NBFCss for utilising their low-cost pool of funds.
  • Factoring business in India has been an underperformer, removal of such bottlenecks shall help REs optimising their business and in turn facilitating easier working capital finance for MSMEs.


  • To provide a little thrust to lagging factoring business in India, RBI has exempted transfer of factoring receivables from the requirement of MHP  under the MD-TLE 
  • The said move can assist in larger participation and increased liquidity in the factoring industry.

Embracing a Wider Scope for TReDS

Transfer of Factoring Units to come under the purview of TLE in lieu of the regulator’s move to enhance TReDs Platform

– Anita Baid, Vice President |

The concept of Trade Receivables Discounting System (TReDS) was introduced by RBI to enable discounting of invoices of MSME sellers against large corporates, including government departments and public sector undertakings, through an auction mechanism to ensure prompt realisation of trade receivables at competitive market rates. 

TReDS transactions fall under the umbrella of “factoring business.” Factoring is a financial practice where a company sells its trade receivables, or outstanding invoices, to a third party at a discount in exchange for immediate cash. TReDS platforms provide a digital infrastructure for facilitating such transactions, enabling efficient invoice discounting and promoting liquidity for MSMEs.(Our FAQs on TReDS and the India Factoring Report 2023 can be read here and here)

In a move to further strengthen the TReDS and promote smoother financial transactions, the RBI has announced significant enhancements to the TReDS guidelines. These enhancements are in line with the announcement made by RBI in the Statement on Developmental and Regulatory Policies dated February 8, 2023, to address certain challenges faced by financiers while bidding for low-rated buyers’ payables on TReDS platforms. (Our article on the same can be read here)

This article intends to discuss the RBI notification dated June 7, 2023 on Expanding the Scope of Trade Receivables Discounting System, introducing the said enhancements.

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Ushering the new-age TReDS Platform

– Anirudh Grover, Executive |

Receivables or debtors though from the face of it is considered as a positive thing for businesses, however when you lift the tag of positivity one can assess the true color of trade receivables. This essentially means that despite it being classified as an asset it may not be helping the business when required. For instance, ABC Ltd has 1 lakh recorded as debtors in its financials however these debtors are of no substantial use unless it is converted into liquid forms of funds. This in essence is the reason why TReDS was introduced, RBI vide Guidelines for the Trade Discounting System (TReDS) opined that the scheme for setting up and operating the institutional mechanism for facilitating the financing of trade receivables of MSMEs from Corporate and other buyers, including Government Departments and Public Sector Undertakings (PSUs), through multiple financiers is known as TReDS.

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2022 in retrospect: Regulatory activity in the financial sector

– Vinod Kothari |

It has been a brisk year in terms of activity – a busy regulator kept  all regulated entities busier. This year marked the initiation of a new SBR framework for NBFCs – hence there was a lot of buzz in terms of understanding the new regulatory framework. The names of 16 Upper layer entities were declared by the RBI – consisting of 5 HFCs, 10 NBFC-ICCs, one CIC[1]. As is the design, UL entities are treated at par with banks in terms of regulatory intensity –hence, there is a LEF (large exposure framework), differential provisioning norms in case of  standard assets, CET-1 capital requirement, mandatory listing etc.

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The Pious Intent of Promoting Factoring

Preserve of a select few?  

Over the last two years, the regulatory developments vis-à-vis factoring, and more specifically, ‘who can be a factor’ has been a to-and-fro ride. With widening of the scope of entities eligible for factoring to its effective roll back vide the Registration of Factors (Reserve Bank) Regulations, 2022 (‘Registration Regulations’), the factoring market found itself stuck in ambiguity arising because of the disparity between the Factoring Regulation (Amendment) Act, 2021 (‘Amendment Act’) and the Registration Regulations. Ironically enough, only days after the notification of Registration Regulations, the Economic Survey 2021-22 was released, which held a rather positive outlook as regards the factoring market, in view of the reliefs provided vide the Amendment Act.

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Factors’ Registration Regulations: Going back to Square-one?

– Megha Mittal

On 14th January, 2022, the Reserve Bank of India (‘RBI’) notified the Registration of Factors (Reserve Bank) Regulations, 2022[1] (‘Registration Regulations’) laying down the manner of granting Certificate of Registration (‘CoR’) to companies which propose to do factoring business. Applicable with immediate effect, this may essentially seem like an undoing of the Factoring Regulation (Amendment) Act, 2021. One of the several objectives of the said Amendment was to allay a doubt, arising from the existing language of the Factoring Act, that entities either had to be principally into factoring business, or not do factoring at all. The RBI’s Regulations almost lead to the very result – either an entity has a Certificate of Registration (COR) as a factor, or it does not do factoring at all.

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Basics of Factoring in India

Megha Mittal, Associate ( )
Factoring as an age-old concept has stood the test of time as it enabled businesses to resolve the cash flow issues, rendered liquidity, facilitated uninterrupted services and cushioned businesses against the lag in the billing cycles. Also the merit of the product lies in the simplicity of the concept which is well understood and accepted. 
The principles of factoring work broadly on the seller selling the receivables of a debtor to a specialised financial intermediary called a factor. The sale of the receivables happens at a discount and transfers the ownership of the receivables to the factor who shall on purchase of receivables, collect the dues from the debtor instead of the seller doing so, enabling the seller to receive upfront funds from the factor.  This allows companies to release the working capital required for holding receivables. 

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Factoring Law Amendments backed by Standing Committee

-Megha Mittal 


In the backdrop of the expanding transaction volumes, and with a view to address the still prevalent delays in payments to sellers, especially MSMEs, the Factoring Regulation (Amendment) Bill, 2020 (‘Amendment Bill’) was introduced in September, 2020, so as to create a broader and deeper liquid market for trade receivables.

The proposed amendments have been reviewed and endorsed by the Standing Committee of Finance chaired by Shri. Jayant Sinha, along with some key recommendations and suggestions to meet the objectives as stated above.  In this article, we discuss the observations and recommendations of the Standing Committee Report  in light of the Amendment Bill.

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Fractured Factoring: Amendments may give a push to a potent trade finance solution


Our other write-ups on Factoring: