Invoice Discounting With Recourse vs Without Recourse: Who Pays If Your Buyer Doesn't?

You discount an invoice, the cash lands, and then your buyer does not pay. Who repays the financier? The answer turns on one word in your agreement, recourse, and on where the invoice was discounted. This guide sets out the rules for bank and NBFC factoring and for TReDS as of October 2026, with a worked ₹10 lakh example.

Invoice discounting with recourse vs without recourse: the short answer

• With recourse: if the buyer does not pay, you repay the financier. RBI's rules for commercial banks book the exposure on you, the assignor, in with-recourse factoring.
• Without recourse: the financier takes the risk that your buyer cannot pay, and books the exposure on the buyer. It does not take the risk that the invoice is disputed. The Factoring Regulation Act, 2011 lets the buyer raise its contract defences against the financier, and the financier can recover that loss from you unless your agreement says otherwise.
• Limited recourse: the agreement lists when the financier can come back to you. RBI lets a bank book the exposure on you or on the buyer, depending on those terms.
• TReDS: deals are without recourse to the MSME seller. Once the buyer accepts the invoice on the platform, it must pay on the due date and cannot set off quality claims.

Under RBI's Trade Receivables Discounting System Directions, 2026, issued on 23 June 2026, invoices discounted on TReDS are without recourse to the MSME seller, and an accepted invoice must be paid on the due date without set-off.

What do the key terms mean?

Term	Plain meaning
Invoice discounting	Raising cash against unpaid invoices before your buyer pays them. Banks and NBFCs offer it as a limit against receivables, as factoring, or on TReDS.
Recourse	The financier's right to come back to you if your buyer does not pay.
With recourse	You stay liable for the money advanced if the buyer does not pay.
Without recourse	The financier takes your buyer's credit risk. You still answer for the invoice being genuine and undisputed.
Limited recourse	Recourse only in the cases your agreement lists.
Assignor and debtor	The Factoring Regulation Act's words for you, the supplier who owns the receivable, and your buyer, who owes it.
Notice of assignment	The notice telling your buyer to pay the financier instead of you.
Set-off	A buyer's right to reduce what it pays, for example for short or faulty supply.
Factoring unit	The TReDS name for an invoice or bill uploaded on the platform.
CERSAI	The central registry where assignments of receivables are filed, so the same invoice is not financed twice.

What happens if your buyer does not pay: four routes compared

Question	Bank limit against receivables	Factoring with recourse	Factoring without recourse	TReDS
Who bears the loss if the buyer cannot pay?	You. It is a loan to you, secured on your receivables	You	The financier	The financier, which pursues the buyer
Whom does the lender book the exposure on?	You	You (RBI para 44(8)(a))	Your buyer (RBI para 44(8)(b))	Your buyer, since TReDS is without recourse to you (TReDS para 20)
Can the buyer cut payment over a quality dispute?	Your loan stays due either way	Yes, it keeps its contract defences (FRA section 16)	Yes, and the financier can recover that loss from you unless agreed otherwise (FRA section 16)	No, not after acceptance (TReDS para 15(i))
Whose credit report shows the non-payment?	Yours	Yours (RBI para 44(7))	Your buyer's (RBI para 44(7))	Not yours, since the deal is without recourse to you
Financial debt of your company under IBC?	Yes, as borrowed money	Yes (section 5(8)(e))	No	No

RBI paragraph numbers refer to the Commercial Banks Undertaking of Financial Services Directions, 2025. TReDS paragraphs refer to RBI's TReDS Directions, 2026. This table is a general guide. Your sanction letter or factoring agreement decides the terms.

With recourse: what you owe and when

In with-recourse factoring, the financier funds your invoice, but you stay on the hook. RBI's directions for commercial banks reckon the exposure on the assignor, which is you, and treat factoring on par with loans and advances (para 44(5) and (8)(a)). That has three consequences.

1. You repay if the buyer does not. The agreement sets when the financier can call on you and what charges apply after the due date.
2. Your credit report carries it. Under RBI's Undertaking of Financial Services Directions for commercial banks, dated 28 November 2025, banks report non-payment under factoring to credit information companies against the party on whom the exposure was booked (para 44(7)). In with-recourse factoring, that party is the supplier, so an unpaid invoice you do not make good can hurt your credit score.
3. It counts as your financial debt. Section 5(8)(e) of the Insolvency and Bankruptcy Code, 2016 treats "receivables sold or discounted other than any receivables sold on non-recourse basis" as financial debt.

A bank limit against receivables, such as a cash credit or a bill discounting line, works the same way in practice. It is a loan to you. Your buyer's payment is how you plan to repay it, not a condition of repaying it.

Without recourse: what it covers and what it does not

Without recourse moves your buyer's credit risk to the financier. RBI requires a bank to appraise your buyer before it factors, and to keep its underwriting of buyer risk within Board-approved limits (paras 10 and 44(2) and (3) of the 2025 Directions). NBFC factors follow matching rules in RBI's NBFC Miscellaneous Directions, 2025 (paras 47 and 51). If your buyer goes insolvent, the loss on the advance sits with the financier.

It does not cover three things.

1. Disputes about what you supplied

Section 16 of the Factoring Regulation Act, 2011 lets your buyer raise against the financier every defence and set-off from the original contract, as if the invoice had not been assigned. The proviso then lets the financier recover from you any loss it suffers from those defences, unless the parties agreed otherwise. A short-supply claim or a quality deduction can therefore come back to you even in a without-recourse deal.

Section 16 of the Factoring Regulation Act, 2011 lets a buyer raise its contract defences and set-off against the factor, and lets the factor recover that loss from the supplier unless their agreement says otherwise.

2. An invoice that is not clean

RBI allows factoring only against invoices for genuine trade transactions (para 44(4)). Section 7(1) of the Act requires you to disclose to the financier, at the time of assignment, any defences and set-off your buyer may have. Banks and factors share information on common borrowers and check CERSAI to stop the same receivable being financed twice (para 44(6)).

3. Payments that reach you instead of the financier

After a notice of assignment, your buyer must pay the financier. Payment to the financier discharges the buyer (section 9), and payment to you does not (section 12). If your buyer pays you anyway, you hold that money in trust for the financier and must pass it on (section 13).

TReDS: why buyer acceptance changes the answer

RBI's Trade Receivables Discounting System Directions, 2026 (RBI/DPSS/2026-27/406, 23 June 2026) replaced the 2014 TReDS guidelines and the 7 June 2023 circular on expanding TReDS (para 28). The rules that matter when a buyer does not pay are these.

• Acceptance is binding. Once your buyer accepts a factoring unit, it has the same sanctity and enforceability as a physical instrument under the Negotiable Instruments Act, 1881 and the Factoring Regulation Act (para 14).
• No set-off after acceptance. The master agreement must record the buyer's unconditional obligation to pay on the due date, with no option for set-offs for quality of goods or otherwise (para 15(i)).
• Without recourse to you. Factoring units discounted on TReDS are without recourse to the seller, and a buyer default is not the platform's responsibility (para 20). RBI's FAQs on TReDS say the MSME seller does not have to pay the financier if the buyer defaults.
• Recovery happens off the platform. Legal proceedings between participants are outside TReDS (para 23).
• Your declaration still matters. You confirm that no other financier or working capital bank has funded or holds a charge on the goods or services behind the invoice (para 15(ii)). The platform files the assignment with CERSAI (para 15(iii)) and informs the banks that hold the buyer's and the seller's working capital accounts (para 18).
• Insurance cost is not yours. Financiers may insure TReDS deals, but the premium cannot be charged to the seller (para 21).

The quality argument does not disappear on TReDS. It moves. The buyer pays the financier in full on the due date, then settles any quality claim with you under your supply contract.

Since 15 October 2026, Central Public Sector Enterprises must route the settlement of MSME invoices through TReDS under section 15A of the amended MSMED Act. Our guide to the MSMED Amendment Act 2026 and TReDS explains that change.

Late payment: who gets the MSMED interest?

If you are a micro or small enterprise and your buyer pays a factored invoice late, section 14 of the Factoring Regulation Act says the financier is entitled to interest for the delay. It must take steps under the MSMED Act to recover that interest, and must pay it to you.

Section 16 of the MSMED Act sets that interest at three times the Bank Rate notified by RBI, compounded monthly. With the Bank Rate at 5.75% since RBI's policy decision of 7 October 2026, that is 17.25% a year.

Illustrative example, assuming a ₹10 lakh invoice from a micro supplier paid one month after the agreed date, and the Bank Rate unchanged: the statutory interest is ₹10,00,000 x 17.25% / 12 = ₹14,375.

Worked example: one ₹10 lakh invoice, three structures

Illustrative example, assuming a micro supplier, a ₹10 lakh invoice due in 60 days, an 80% advance at 12% a year for bilateral factoring, and a 9% a year winning bid on TReDS. The same 12% is used for both factoring columns to keep the comparison simple. These rates are assumptions, not offers.

	Factoring with recourse	Factoring without recourse	TReDS
Cash you receive today	₹8,00,000	₹8,00,000	₹9,85,205, before platform fees
Financing cost for 60 days	₹15,781	₹15,781	₹14,795
Held back until the buyer pays	₹2,00,000	₹2,00,000	Nil
Buyer goes insolvent and pays nothing	You repay ₹8,00,000 plus charges	The financier bears the ₹8,00,000. You do not receive the ₹2,00,000 held back, if it is payable only on collection	The financier pursues the buyer. You keep ₹9,85,205
Buyer disputes ₹3,00,000 for quality and pays ₹7,00,000	You make up the ₹1,00,000 shortfall on the advance, plus charges	Under section 16, the financier can recover its ₹1,00,000 shortfall from you unless the agreement says otherwise	The buyer must pay the full ₹10,00,000 to the financier and take up the quality claim with you

Formulas: factoring cost = ₹8,00,000 x 12% x 60 / 365 = ₹15,781. TReDS discount = ₹10,00,000 x 9% x 60 / 365 = ₹14,795. In both factoring columns, the ₹2,00,000 held back is also lost to you in the dispute case, because the buyer's ₹7,00,000 does not cover the advance.

Without recourse protects you against your buyer's inability to pay. It does not protect you against a dispute about what you supplied. On TReDS, the buyer's acceptance closes that gap for the financier, which is why pricing there depends on your buyer's credit more than yours.

For how these products compare on cost and control, read invoice discounting vs factoring vs bill discounting.

Where vendor and contractor bill discounting fit

Suppliers and contractors to large real estate developers can discount approved bills raised on the developer. MoneyKarma's vendor bill discounting product lists a minimum 10% margin and a tenor of up to 90 days. Whether the lender can come back to you if the developer does not pay depends on the programme agreement. Ask three questions before you sign.

1. Is the facility with recourse, without recourse or limited recourse to me?
2. Has the developer approved the bill unconditionally, or can it still deduct for defects?
3. If the developer pays late, who claims the delay interest, and is it passed to me?

Our guides to vendor bill discounting for suppliers and contractor bill discounting cover eligibility and costs.

A checklist before you discount an invoice

1. Find the word "recourse" in your agreement. If the sanction letter or factoring agreement is silent, ask the financier in writing.
2. Read the dispute clause. Section 16 lets the financier recover dispute losses from you "unless otherwise agreed", so the contract wording matters.
3. Get acceptance before you discount. A written acceptance from your buyer, or acceptance on TReDS, narrows the room for later deductions.
4. Check with your cash credit bank. If your limit is secured on book debts, read whether your sanction lets you discount those receivables elsewhere. RBI asks banks to collect periodic certificates on factored receivables and to check CERSAI, and TReDS asks you to declare the invoice is not charged to another lender.
5. Keep supply records clean. Delivery proof, inspection reports and invoices that match the purchase order make a dispute harder to raise.
6. Compare the annual cost. Convert every discount into a yearly rate before you compare it with your cash credit.
7. Track the due date. If a buyer pays late, micro and small suppliers have a statutory interest claim under the MSMED Act.

How MoneyKarma helps

MoneyKarma is a loan distribution platform for Indian businesses and real estate developers, with 90+ lenders. Not a lender. Our lending partners include public sector banks, private banks, NBFCs and financial institutions. If slow-paying buyers are holding up your cash, we help you compare receivables options, from limits against receivables to factoring and vendor bill discounting, and check the recourse terms before you sign. The lender makes the credit decision. Share your requirement or read more on invoice discounting.

This guide is general information, not financial, legal or tax advice. Rules change. Confirm the terms in your sanction letter and agreements, and with your lender and advisers.