Biodiesel can be produced by transesterification of vegetable or waste oil catalysed by lipases. Biodiesel is an alternative energy source to conventional fuel. It combines environmental friendliness with biodegradability, low toxicity and renewability. Biodiesel transesterification reactions can be broadly classified into two categories: chemical and enzymatic. The production of biodiesel using the enzymatic route eliminates the reactions catalysed under acid or alkali conditions by yielding product of very high purity. The modification of lipases can improve their stability, activity and tolerance to alcohol. The cost of lipases and the relatively slower reaction rate remain the major obstacles for enzymatic production of biodiesel. However, this problem can be solved by immobilizing the enzyme on a suitable matrix or support, which increases the chances of re-usability. The main factors affecting biodiesel production are composition of fatty acids, catalyst, solvents, molar ratio of alcohol and oil, temperature, water content, type of alcohol and reactor configuration. Optimization of these parameters is necessary to reduce the cost of biodiesel production.