In one sentence
Factoring and invoice discounting turn current, undisputed receivables into cash now for a fee, while debt collection recovers receivables that are already overdue; they solve different problems at opposite ends of the receivables curve.
Key takeaways
- Factoring and invoice discounting turn future receivables into cash now, for a fee; debt collection recovers receivables that are already overdue.
- Factors buy current, undisputed invoices from creditworthy buyers. They do not buy your problem accounts — those are the collection agency's work.
- A business with a DSO problem often needs neither: it needs ownership and consequence inside its own process.
- TReDS gives registered MSMEs a regulated route to discount invoices on large corporate buyers.
Two different problems
Factoring answers the question "how do I get cash from invoices that are not yet due?" Debt collection answers "how do I get paid on invoices that are overdue and not being paid?" They sit at opposite ends of the receivables curve, and confusing them is expensive: a business that factors to solve a collection problem pays a financing fee and keeps the problem.
What factoring and invoice discounting are
Factoring: a financier buys your receivables, advances most of the invoice value now, collects from your customer on the due date, and pays you the balance less a fee. In recourse factoring the risk of non-payment stays with you; in non-recourse it passes to the factor, at a higher price. Invoice discounting: the same advance against invoices, but you keep collecting and your customer may not know. TReDS: the regulated platforms on which registered MSMEs auction invoices on large corporate buyers to financiers — usually the cheapest route, available only to MSME suppliers with eligible buyers.
What all of them require: current invoices, undisputed, on buyers the financier considers creditworthy. Factors do not buy overdue, disputed or doubtful receivables. Your problem accounts stay yours.
What debt collection is
Recovery of receivables that are already overdue and not being paid — by a process with an owner, recorded promises, skip tracing, field presence, and if necessary a legal route. It is charged on success or by engagement, not as a financing cost. How Kenstone Capital runs it is on Recover dues.
The third option most businesses need
A high DSO is usually a process problem before it is a financing problem: collection sits with the salesperson, promises are verbal, disputes have no owner, and an overdue invoice costs the customer nothing. Factoring pays a fee to bridge the gap that this creates; collection recovers the accounts it produces. Fixing the process — one owner, promises on record, credit blocks — shrinks the gap itself. That is the DSO Reduction Programme, and for most mid-market businesses it releases more working capital than either alternative, without a financing cost.
When to use which
| Situation | Use | Why |
|---|---|---|
| Growth is constrained by cash tied up in current, good receivables | Factoring / discounting / TReDS | Buys time; the receivables are sound, you just need them sooner |
| Accounts are overdue and follow-up has stopped working | Debt collection | The receivables need recovery, not financing |
| DSO has crept up over years and nobody owns it | Fix the process | The gap is self-inflicted; closing it costs less than bridging it |
| A debtor has shut down or refuses to engage | Enforcement, or write-off | Neither a factor nor a reminder will change this |
Sources and regulation
| Instrument | What it does | Source |
|---|---|---|
| Factoring Regulation Act, 2011 (as amended 2021) | Registration of factors; assignment of receivables | indiacode.nic.in |
| RBI — TReDS guidelines | Trade Receivables Discounting System for MSME suppliers | rbi.org.in |
| MSMED Act, 2006 | MSME payment timelines and interest on delay | msme.gov.in |
Thresholds, limitation periods and procedures change. This guide describes the position as generally understood at the time of writing and is not legal advice; confirm the current rule before acting.
If this is your situation: you are weighing financing against fixing the receivables themselves.
The DSO Reduction Programme