There are six recognisable types of supply chain finance in India: vendor (supplier) finance, dealer (channel) finance, reverse factoring, invoice/bill discounting, factoring, and dynamic discounting. They separate on three axes — who initiates the programme (anchor buyer, seller, or buyer self-funding), whether it runs with or without recourse, and which rail (bank, NBFC, or TReDS) carries it. Get those three right and most “SCF” confusion disappears.
The table below maps the six against those axes so you can tell at a glance which programme a financier is actually pitching you.
In one line: the six programmes are different ways of putting institutional liquidity on your anchor’s rating, off the supplier’s balance sheet — they vary by who starts the deal, who bears a buyer default, and which regulated rail carries the money.
All six sit inside the wider supply chain finance toolkit, and the rail beneath them is bank, NBFC or TReDS — where TReDS is one rail of three, not a synonym for SCF. New to the anchor model? Our explainer on how supply chain finance works covers the mechanics before you compare programmes.
The six programmes at a glance
Each programme is distinct in law and accounting — not an interchangeable label. The differences that matter in practice are the three middle columns below.
| Programme | What it finances | Who initiates | Typical recourse | Usual rail(s) |
|---|---|---|---|---|
| Vendor / supplier finance | A supplier’s invoices already approved by the anchor | Anchor buyer sets up the programme | Without recourse (true factoring) | Bank · NBFC · TReDS |
| Dealer / channel finance | A dealer’s purchases of the anchor’s goods (inventory) | Anchor / financier | Usually with recourse | Bank · NBFC |
| Reverse factoring | The anchor’s payables to its MSME suppliers | Anchor / buyer | Without recourse to the supplier | TReDS · Bank · NBFC |
| Invoice / bill discounting | A seller’s own invoices, on the seller’s credit | Seller | Usually with recourse | Bank · NBFC |
| Factoring | A seller’s receivables, sold (assigned) to a factor | Seller | Recourse or non-recourse | NBFC-Factor · Bank |
| Dynamic discounting | Early payment funded from the buyer’s own cash | Buyer | N/A — no third-party financier | None (buyer self-funds) |
Rates across the financed programmes are indicative and priced per case — on TReDS they are auction-discovered, never posted. Indicatively, TReDS clears around 6.5–9% p.a., bank-led programmes around 7.5–9.5%, and NBFC programmes around 9–12%, with advances commonly up to 80–90% of invoice value (higher on an approved TReDS factoring unit).
The two axes that actually separate them
Who initiates — anchor, seller, or buyer
The cleanest way to read the six is by who starts the deal.
- Anchor-initiated: vendor finance, dealer finance and reverse factoring are set up by the large buyer (the anchor) for its supply chain. The anchor’s rating is the credit being priced — the whole point of anchor-led SCF, where a low-rated MSME effectively borrows on the buyer’s standing.
- Seller-initiated: invoice/bill discounting and factoring are arranged by the seller against its own receivables, on its own credit. No anchor sponsors the programme.
- Buyer-initiated, self-funded: dynamic discounting is the odd one out — the buyer offers suppliers early payment from its own surplus cash in exchange for a discount. No bank, NBFC or platform is involved, so there is no third-party financier and no recourse question.
That single distinction explains most pricing differences. In reverse factoring and vendor finance, the rate keys off the anchor’s credit; in plain bill discounting, you borrow on your own balance sheet — usually more expensively.
With or without recourse — who eats a buyer default
Recourse decides who is left holding the loss if the buyer fails to pay.
- Without recourse (vendor finance and reverse factoring as true factoring; TReDS by design): the financier buys the receivable and bears the buyer default. For the seller, this can support de-recognition of the receivable — moving the financing off its books — but only if the Ind AS 109 “true sale” tests are met.
- With recourse (most invoice/bill discounting and dealer finance): the seller stays liable if the buyer defaults, so economically it is a secured borrowing that typically stays on the balance sheet.
- Either (factoring): structured case by case as recourse or non-recourse.
A crucial accuracy point: on TReDS the financing is without recourse to the MSME seller once the buyer accepts the invoice. And for the anchor, whether reverse factoring stays a trade payable or gets reclassified as borrowing is a conditional Ind AS judgement — never automatically off-balance-sheet.
Which rail carries each programme
India’s SCF runs across three legal rails, and the six programmes distribute across them rather than mapping one-to-one. TReDS — the RBI-regulated auction marketplace governed by the Payment & Settlement Systems Act, 2007 (Guidelines, 3 Dec 2014) — carries MSME-seller-only reverse factoring and factoring through its four licensed platforms (RXIL, M1xchange, Invoicemart and C2treds, the last live since May 2024). Bank lines carry vendor finance, dealer/channel finance and bill discounting under sanctioned limits. NBFC-Factors, governed by the Factoring Regulation Act, 2011 (as amended 2021), carry factoring, reverse factoring and dealer finance, typically for non-MSME sellers and lower-rated anchors. Choosing the rail is a separate decision we unpack in TReDS vs bank vs NBFC.
The pair most people mislabel is reverse factoring versus vendor finance: both are anchor-led and without recourse, but reverse factoring is framed from the anchor’s payables side (the buyer arranges early payment to suppliers), while vendor finance is framed from the supplier’s receivables side. We draw the line in detail in vendor finance vs dealer finance and payables finance and reverse factoring for the CFO.
Why the spread of programmes exists: the credit gap
India needs six programmes rather than one because of the sheer scale of the problem they share. The MSME sector faces a credit gap of roughly ₹20–25 lakh crore, per the RBI’s U.K. Sinha Expert Committee on MSMEs (2019) — a structural shortfall that collateral-based lending cannot close. Each programme attacks a different slice: vendor finance and reverse factoring fund approved invoices, dealer finance funds inventory drawdowns, discounting and factoring fund a seller’s own book, and dynamic discounting deploys idle buyer cash.
As a marker of how far just one rail has scaled, TReDS financed an estimated ~₹2.35 lakh crore of MSME invoices in FY25 (platform and press reporting, a state-of-the-rail figure, not an RBI statistic) — large, yet a fraction of the gap, which is precisely why bank and NBFC programmes remain essential rather than legacy. The forcing function pushing anchors toward reverse factoring specifically is Section 43B(h) of the Income Tax Act (Finance Act 2023, effective AY 2024-25): a buyer who pays a registered micro or small supplier beyond the MSMED Act limit (15 days without an agreement, 45 with one) loses the tax deduction until it actually pays.
FAQ
What are the main types of supply chain finance in India? Six: vendor (supplier) finance, dealer (channel) finance, reverse factoring, invoice/bill discounting, factoring, and dynamic discounting. They differ by who initiates the programme (anchor, seller, or buyer), whether they are with or without recourse, and which rail carries them — bank, NBFC, or the RBI-regulated TReDS platforms. The first three are anchor-led; discounting and factoring are seller-led; dynamic discounting is buyer-funded.
What is the difference between vendor finance and reverse factoring? Both are anchor-led and typically without recourse, but they are framed from opposite sides of the same invoice. Vendor finance is viewed from the supplier’s receivables — the supplier gets paid early against approved invoices. Reverse factoring is viewed from the anchor’s payables — the buyer arranges a financier to pay its MSME suppliers early while the buyer settles later. In practice the structures overlap closely.
Which types of supply chain finance are without recourse? Vendor finance and reverse factoring, when structured as true factoring, are without recourse — the financier bears a buyer default. TReDS is without recourse to the MSME seller by design once the buyer accepts the invoice. Factoring can be either recourse or non-recourse. Plain invoice/bill discounting and most dealer finance are usually with recourse, so the seller stays liable and the financing stays on its balance sheet.
Is dynamic discounting a type of supply chain finance? Yes, but it is the outlier. Dynamic discounting is funded from the buyer’s own surplus cash, not a bank, NBFC, or platform — the buyer offers suppliers early payment in exchange for a discount. Because there is no third-party financier, there is no recourse question and no rail. It suits cash-rich anchors wanting a return on idle balances while helping suppliers, but it does not extend the buyer’s liquidity the way financed programmes do.
Which type does a corporate buyer usually need for 43B(h) compliance? Reverse factoring is the cleanest fit. Section 43B(h) makes a buyer lose its tax deduction if it pays registered micro and small suppliers beyond 45 days. Reverse factoring lets a financier pay those suppliers early — inside the window — while the anchor settles the financier later, preserving both the deduction and the buyer’s longer payable terms. Whether it stays off the anchor’s balance sheet is a conditional Ind AS judgement, never automatic.
To map the right mix of programmes across banks, NBFCs and TReDS — channel-agnostic, with the rail choice made on your numbers — talk to Finnova. CA- and ex-banker-led. Part of Finnova’s ₹4,250 Cr+ mobilised across 100+ corporate-finance mandates since 2011.
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