How does TReDS Operate?

TReDS is a digital platform created to streamline the financing and discounting of trade receivables for Micro, Small, and Medium Enterprises (MSMEs) with the support of multiple financiers. These receivables originate from corporates and other buyers, including Government Departments and Public Sector Undertakings (PSUs). By allowing multiple financiers to bid on invoices or bills of exchange owed by corporations, government departments, and PSUs, TReDS helps MSMEs gain quick access to working capital.

Let’s understand how TReDS operates!

How does TReDS operate?

The financing and discounting process on the TReDS platform broadly involves the following steps:

1. Creation of a Factoring Unit (FU): 

Factoring Unit (FU) is a standard term used on TReDS to represent invoice(s) or bill(s) of exchange containing details of the sale of goods or services by the MSME sellers to the buyers. Each FU represents a confirmed obligation of the corporates or other buyers, including Government Departments and PSUs. The FU is created either by the MSME seller (in the case of factoring) or by the buyer (in the case of reverse factoring).

2. Acceptance of the FU by the counterparty:

Either the buyer or the seller, depending on who created the FU, has to accept the FU. Then only the bidding process can begin.

3. Bidding by financiers:

Multiple banks, NBFCs, and other financiers initiate bids for discounting of FU.

4. Selection of the best bid by the seller or the buyer, as applicable:

The creator of the FU must choose the bid based on their assessment of the discounting rate and other relevant factors.

5. Payment made by the financier:

The financier of the selected bid makes the payment to the MSME seller at the agreed financing or discounting rate.

6. Payment by the buyer to the financier on the due date:

The buyer must pay the full amount to the financiers on the due date.

Conclusion

The TReDS platform plays a crucial role in addressing the liquidity challenges faced by MSMEs by providing them with timely access to working capital. Through its well-structured process involving multiple participants and competitive bidding, TReDS ensures the efficient flow of funds, reduces payment delays, and fosters a more inclusive financial ecosystem. The platform’s ability to enable further discounting and assignment of factoring units enhances its effectiveness, making it a vital tool in strengthening the MSME sector’s financial health.

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