Cash flow is the lifeblood of any business. For Indian MSMEs, delayed payments and outstanding invoices often cause liquidity crises—affecting everything from payroll to procurement. That’s where factoring services come in.

Factoring allows businesses to sell their unpaid invoices to a third-party (factor) in exchange for immediate working capital. It’s a powerful financial tool that helps MSMEs unlock money tied up in receivables without taking on debt.

✅ What is Factoring?

Factoring is a financial arrangement where a business sells its accounts receivable (invoices) to a third party (called a factor) at a discount. The factor immediately advances up to 80–90% of the invoice value and collects payment from the client directly when the invoice becomes due.

✅ Is Factoring Available in India for MSMEs?

Yes. Factoring is gaining traction in India, especially after the introduction of TReDS (Trade Receivables Discounting System) by the RBI. Several private NBFCs and banks also offer factoring services to registered MSMEs.

Popular Factoring Platforms in India:

• RXIL (Receivables Exchange of India Ltd)
• Invoicemart (Axis Bank + mjunction)
• M1xchange
• CredAble, Drip Capital, KredX (Private players)

✅ Types of Factoring Available

✅ How Factoring Works (Step-by-Step)

1. Invoice Raised: You raise an invoice on your buyer/client.
2. Sell to Factor: Submit invoice to factor for verification.
3. Advance Payment: Factor pays 80–90% of invoice value upfront.
4. Collection: Factor collects payment from your client on due date.
5. Balance Settlement: Once collected, the remaining amount (minus service fees) is released to you.

✅ Benefits of Factoring for MSMEs

• Improved Cash Flow: No more waiting 30–90 days for receivables.
• Debt-Free: Not a loan, so doesn’t affect debt-to-equity ratio.
• Outsourced Collections: Saves time and resources.
• Stronger Credit Rating: Regular use of factoring improves financial stability.
• Eligibility for Govt TReDS Schemes.

✅ Prerequisites to Use Factoring Services in India

• GST Registration and Udyam MSME Registration
• Valid KYC and PAN of business and promoters
• Creditworthy Clients: Factoring is based on your client’s ability to pay
• Minimum Annual Turnover: ₹20 lakh–₹1 crore depending on provider
• Business Bank Account for transactions
• Invoice Copies + Agreement with Clients

Note: Factoring is not ideal for cash businesses or companies dealing in advance payments.

✅ Cost of Factoring in India

• Discount Rate / Interest: 1%–3% per 30 days
• Processing Fees: 0.25%–1% (one-time)
• Documentation Charges / Legal Fees (case-to-case basis)

Compare this with short-term loan interest rates (~12–24%) to assess feasibility.

✅ TReDS: RBI-Backed Factoring for MSMEs

TReDS is a digital platform regulated by the RBI that enables MSMEs to get their invoices discounted by multiple financiers. It is open to:

• MSMEs (sellers)
• Corporates / PSUs (buyers)
• Banks & NBFCs (financiers)

Benefits:

• Transparent bidding
• Government-backed credibility
• Faster turnaround

✅ Risks & Limitations

• Client Default Risk (in recourse factoring)
• Disclosure Sensitivity – some clients may not like third-party involvement
• Service Charges may be higher than traditional credit lines
• Availability for Low Turnover Businesses is limited

Final Word

Factoring is an excellent alternative to working capital loans for MSMEs struggling with delayed receivables. While it comes at a cost, the speed, simplicity, and non-debt nature of this solution make it ideal for modern-day cash flow management.

At bizconsulting.io, we help small businesses connect with top factoring platforms, understand TReDS onboarding, and evaluate the true cost of factoring.

If your money is locked in invoices—unlock it smartly with factoring.

Tags: Factoring India 2025, MSME Cash Flow, Invoice Discounting, TReDS India, Working Capital Without Loans, Business Finance