Cash flow problems don’t mean your business is failing. Most of the time, they mean your money is stuck sitting in unpaid invoices, waiting for a customer who has 60 or 90 days to pay. This single gap is one of the biggest reasons MSMEs in India struggle to grow, even when their order books are full.
This is exactly the gap that NBFC-Factors were built to close. And in 2026, RBI has made the biggest changes to this space since the 2022 amendment reshaping how factoring works through TReDS platforms.
In this guide, we explain what an NBFC-Factor is, how factoring works, what changed in the 2022 amendment, and what’s new in 2026. We also cover common mistakes NBFCs make, and how to know if your business needs one.
What Is an NBFC-Factor?
An NBFC-Factor is a type of Non-Banking Financial Company. Its core business is factoring: buying unpaid invoices (called receivables) from a business, and paying cash for them right away.
Here’s the simple version. You sell goods. Your customer owes you money but hasn’t paid yet. Instead of waiting, you sell that unpaid invoice to an NBFC-Factor. The NBFC-Factor gives you most of the invoice value in cash, immediately. Later, the NBFC-Factor collects the full payment from your customer.
You get working capital today. The NBFC-Factor earns its return from the small discount it applied when it bought your invoice.
This is not a loan. You are not borrowing money and paying it back with interest. You are selling an asset your invoice for immediate cash.
A Simple Example of How Factoring Works
Your business sells goods worth ₹10 lakh to a customer. The customer gets 60 days credit to pay.
Here’s what happens with factoring:
- You approach an NBFC-Factor and offer to sell this invoice.
- The NBFC-Factor checks your customer’s credit history and the invoice details.
- The NBFC-Factor pays you ₹9.5 lakh immediately (a discount of ₹50,000 is applied as their fee).
- After 60 days, the NBFC-Factor collects the full ₹10 lakh from your customer.
You received ₹9.5 lakh on day one instead of ₹10 lakh on day sixty. For most growing businesses, that immediate cash is worth far more than the small discount.
Why This Matters: The MSME Cash Flow Problem
India’s MSME sector runs on delayed payments. Large buyers routinely push out payment terms to 60, 90, or even 120 days. Meanwhile, MSMEs still have to pay their own staff, vendors, and rent on time.
Factoring solves this directly. It converts your unpaid invoices into usable cash, without you taking on new debt. This is why the government built an entire legal structure around it: the Factoring Regulation Act, 2011.
Factoring vs Bill Discounting: Know the Difference
Factoring: The NBFC-Factor buys your invoice and takes on the job of collecting payment from your buyer.
Bill Discounting: A bank or NBFC gives you a percentage of your invoice value upfront. But in most cases, especially recourse bill discounting, you (the seller) remain responsible if your buyer doesn’t pay.
The core difference: who carries the risk of the buyer defaulting.
Types of Factoring You Should Know
Recourse Factoring
If your buyer fails to pay, you must return the advance you received to the factor.
Non-Recourse Factoring
If your buyer fails to pay, the NBFC-Factor absorbs the loss — not you. This usually comes with higher fees or a lower advance percentage.
The History: Factoring Regulation Act, 2011
The Factoring Regulation Act, 2011 built a legal foundation for factoring. But under the original Act, RBI only registered a company as an NBFC-Factor if it met the “principal business criteria” (PBC): at least 50% of its assets and 50% of its income had to come from factoring. This was a tough bar. Most NBFCs couldn’t meet it, and the factoring market stayed small for over a decade.
The 2022 Amendment: What Changed
In January 2022, RBI issued the Registration of Factors (Reserve Bank) Regulations, 2022 and the Registration of Assignment of Receivables (Reserve Bank) Regulations, 2022. Together these opened the door for many more NBFCs, including NBFC-ICCs, to enter factoring — though the 50% PBC rule still applies for full NBFC-Factor registration.
Key Changes from 2022
- Removal of blanket restrictions that had shut most NBFCs out of factoring
- Clear timelines for registering invoices and charges, to prevent fraud through dual financing
- TReDS platforms allowed to register charges directly with CERSAI on behalf of factors
- Updated definitions for “assignment,” “factoring business,” and “receivables” to match international standards
What’s New in 2026: The TReDS Overhaul
This is the biggest factoring-related update in years, and every NBFC-Factor needs to know it.
On April 8, 2026, RBI released draft “Trade Receivables Discounting System (TReDS) Directions, 2026” to strengthen financing access for MSMEs by rationalising and harmonising existing guidelines into a single Master Direction. After a stakeholder feedback window, RBI issued the final Master Direction on TReDS on 23 June 2026, consolidating years of scattered circulars into one comprehensive framework.
Here’s what actually changed for factors, financiers, and MSME sellers:
Bigger capital requirement for platform operators.
The Master Direction fixes a minimum net worth of ₹25 crore for TReDS platform operators, in line with other non-bank payment system operators, and requires certification by a statutory auditor. Existing authorised entities have until 31 March 2028 to meet this requirement.
Onboarding just got faster for MSMEs.
RBI has dispensed with the mandatory due diligence requirement for MSME sellers at onboarding entirely. Funds are still disbursed only to the seller’s KYC-verified bank account, so the payment safeguard stays intact even as the onboarding friction is removed.
Financiers now get formal access to guarantee cover.
Financiers can now obtain guarantee cover for factoring units from any credit guarantee fund trust set up by the government not just one designated body. This formally permits financiers to avail guarantees from NCGTC (National Credit Guarantee Trustee Company Limited) against factoring units, which lowers the risk financiers carry and should, in theory, translate into more competitive discount rates for sellers.
New participants allowed on TReDS.
Insurance companies and government-notified credit guarantee funds are now permitted as participants on TReDS platforms.
Seller protections are written into the framework.
The framework states that factoring units discounted under TReDS shall be without recourse to sellers, and that buyer default is not TReDS’s responsibility. Where financiers use insurance, the premium cannot be charged to the seller.
Why this matters for your business: TReDS has already facilitated over ₹7 lakh crore in MSME financing, though its addressable market remains significantly underleveraged. If you’re an NBFC-Factor or planning to become one, this Master Direction changes your onboarding process, your capital planning (if you also operate a platform), and your access to guarantee cover. If you’re an MSME, this means faster access to TReDS and lower onboarding barriers than before.
Other 2026 Developments That Touch Factoring NBFCs
Beyond TReDS, a few other 2026 RBI updates are worth knowing if you run an NBFC involved in factoring or lending:
- RBI’s amendment to Income Recognition, Asset Classification and Provisioning norms now permits NBFCs to factor in Default Loss Guarantee (DLG) arrangements while computing Expected Credit Loss, subject to Ind AS conditions. This directly affects how factoring NBFCs provision for risk on their books.
- A separate 2026 amendment on capital adequacy and owned fund computations draws its authority partly from Section 3, Section 31A, and Section 6 of the Factoring Regulation Act, 2011, confirming that RBI continues to treat factoring compliance as tightly linked to broader NBFC capital norms.
- On April 29, 2026, RBI introduced amendments creating regulatory relief for NBFCs that don’t raise public funds and don’t interact with customers directly, effective from July 1, 2026. This is a general NBFC change, but it matters if your group structure includes holding entities alongside your factoring arm.
How to Register as an NBFC-Factor
Step 1: Check your eligibility path.
New companies apply directly to RBI for a Certificate of Registration (CoR), meeting the principal business criteria. Existing NBFC-ICCs can apply if they don’t accept public deposits, hold total assets of ₹1,000 crore or more, meet the Net Owned Fund requirement, and stay fully compliant.
Step 2: Plan for conversion if you don’t qualify yet.
NBFC-ICCs that don’t meet these conditions must approach RBI for conversion, and separately comply with PBC rules.
Step 3: Submit full documentation, including surrender of your original CoR if converting from NBFC-ICC status.
Step 4: Start operations within six months of receiving your CoR.
Banks and certain government-backed entities can factor invoices under Section 5 of the Act without separate registration.
Asset Classification: When Does a Receivable Become an NPA?
Assets below ₹500 crore: A receivable overdue for more than 180 days becomes an NPA, regardless of recourse type.
Assets of ₹500 crore or more: A receivable overdue for more than 90 days becomes an NPA, regardless of recourse type.
Getting this classification wrong is a common compliance error — and one that draws regulatory attention fast.
Risk Management Expectations
RBI expects every NBFC-Factor to:
- Set up proper control and reporting mechanisms before starting factoring
- Run thorough credit checks on the buyer before entering any factoring deal
- Only factor invoices representing genuine trade transactions
- Get board-approved limits for non-recourse underwriting commitments
- Share borrower information with banks and other NBFCs to avoid double financing
What If Your Company Doesn’t Qualify Yet?
- Submit a transition plan showing your timeline to meet the PBC threshold
- Invest in factoring infrastructure staff, contracts, systems
- Prepare detailed documentation on target clients, volumes, and projections
- Explore interim or conditional approval with RBI
- Start with an NBFC-ICC license, then convert once eligible
Export and Import Factoring
If your NBFC wants to factor invoices in foreign currency, you need separate authorization from RBI’s Foreign Exchange Department under FEMA, 1999.
Common Mistakes NBFCs Make in Factoring
- Misclassifying receivables past the 90 or 180-day NPA threshold
- Skipping proper credit appraisal on the buyer side
- Not sharing borrower data with other lenders, creating double-financing risk
- Underestimating documentation needed for CoR applications
- Missing the new TReDS onboarding and capital changes if operating a platform
Why This Matters for Your Business Right Now
2026 has been an active year for RBI on the NBFC front the TReDS Master Direction, DLG-linked ECL changes, capital adequacy recalibration, and a new registration exemption category all landed within months of each other. If you’re an NBFC exploring factoring, or already in it and unsure whether your setup matches RBI’s current rules, this is not the year to guess.
This is exactly where NBFC Advisory comes in. We help NBFCs and NBFC-ICCs:
- Assess your eligibility for NBFC-Factor registration today
- Build a compliant transition plan if you’re not yet eligible
- Prepare and file your CoR application with RBI
- Design board-approved risk management and underwriting frameworks
- Set up asset classification and NPA reporting that matches RBI’s current thresholds
- Stay current as RBI rules keep evolving through 2026 and beyond, including the new TReDS framework
If you’re considering entering factoring, or want to confirm you’re fully compliant with the 2026 changes, reach out to NBFC Advisory. We’ll walk through your specific situation and tell you exactly where you stand.
Need expert guidance? Get in touch with our consultants today.
📞 Call NBFC Advisory: +91 93287 18979
🌐 Visit: nbfcadvisory.com
