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TReDS: A Game-Changer for MSME Financing & Compliance!

The Trade Receivables Discounting System (TReDS) is a digital platform designed to facilitate the financing of trade receivables for Micro, Small, and Medium Enterprises (MSMEs). By enabling MSMEs to discount their invoices through multiple financiers, TReDS ensures timely payments, improved cash flow, and reduced credit risks. It provides a transparent, efficient, and paperless mechanism for invoice discounting, benefiting all stakeholders—buyers, sellers, and financiers. This document explores how TReDS helps businesses stay compliant with MSME regulations while optimizing their working capital.

Benefits to the buyer:

1. Compliance with MSME Payment Regulations (45-Day Rule)

As per the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006, buyers must pay MSMEs within 45 days from the date of acceptance of goods/services.
If payment is delayed beyond 45 days, buyers are liable to pay penal interest at three times the RBI’s bank rate (as per Section 16 of the MSMED Act).
Using TReDS, buyers ensure timely payment and avoid legal or financial penalties.

2. Prevention of Income Tax Disallowance

As per Section 43B(h) of the Income Tax Act (effective from FY 2023-24), payments to MSMEs must be made within 45 days to qualify as a deductible business expense.
If payments exceed 45 days, the expense is disallowed in the same financial year and can only be claimed in the year it is paid.
Using TReDS, buyers ensure that MSME payments are within the statutory limit, preventing tax disallowances and reducing unnecessary tax liabilities.

3. Efficient Working Capital Management

Buyers do not need to pay MSMEs immediately; financiers settle the invoices upfront, and buyers pay on the agreed due date (e.g., 45 to 90 days).
This allows buyers to optimize cash flow and working capital without impacting supplier relationships.

4. No Impact on Buyer’s Credit Limits

Since the invoice is financed by third-party lenders, it does not appear as debt on the buyer’s balance sheet.
This keeps borrowing capacity intact for other business needs.

5. Strengthening Supplier Relations & Cost Savings

Ensuring timely payments through TReDS makes MSMEs financially stable, leading to better pricing negotiations and supply chain reliability.
Avoids the risk of penal interest (RBI rate × 3) and tax disallowances, ultimately reducing overall procurement costs.

6. Fully Online & Seamless Process

The entire TReDS platform is digital, making invoice discounting, approval, and settlement fast and hassle-free.
Buyers can approve invoices with a few clicks, reducing paperwork and administrative burden.
The system ensures transparency, as all transactions are recorded electronically, minimizing disputes and errors.

Benefits to the seller:

1. Faster Access to Working Capital

Instead of waiting 45 to 90+ days for buyers to pay, sellers can get immediate funds by discounting their invoices on TReDS.
This improves cash flow, enabling smoother business operations and faster reinvestment.

2. No Collateral Required

Unlike traditional loans, TReDS financing is based on approved invoices and does not require additional security or collateral.
This makes it an easy and risk-free financing option for MSMEs.

3. Competitive Discounting Rates

Sellers can receive financing at lower interest rates since banks and NBFCs compete to offer the best rates.
The cost of discounting is usually lower than unsecured business loans or overdraft facilities.

4. No Chasing Buyers for Payments

Once the buyer approves an invoice on TReDS, the seller gets paid by the financier, eliminating the need for constant follow-ups.
This reduces payment delays and disputes with large buyers.

5. Protection from MSME Late Payment Issues (45-Day Rule)

The MSMED Act, 2006 mandates that buyers must pay MSMEs within 45 days.
By using TReDS, sellers ensure they receive funds on time, avoiding liquidity issues.

6. Fully Digital & Hassle-Free Process

The entire process, from invoice submission to payment, is online—no paperwork or bank visits required.
Transactions are transparent and secure, with real-time tracking.

Benefits of TReDS for Financiers (Banks & NBFCs):

Low-Risk Lending – Invoices are approved by large, creditworthy buyers, reducing default risk.
Short-Term Investment Opportunity – Financing periods are typically 30-90 days, ensuring quick capital rotation.
Better Risk-Adjusted Returns – Higher yields compared to traditional corporate lending.
No Need for Additional Collateral – Loans are backed by invoices, simplifying risk management.
Regulated & Transparent Platform – RBI-regulated system ensures secure and compliant transactions.
Access to a Wider MSME Market – Enables financiers to tap into a large pool of MSMEs needing liquidity.
Efficient & Paperless Processing – Fully digital workflow reduces administrative costs and speeds up approvals.

Conclusion

TReDS has revolutionized the MSME financing ecosystem by offering faster payments, compliance assurance, and improved cash flow management. Buyers benefit from regulatory compliance and better supplier relationships, sellers gain quick access to working capital without collateral, and financiers access low-risk, short-term lending opportunities. With its fully digital and seamless process, TReDS fosters a more efficient, transparent, and financially inclusive business environment. Adopting TReDS is a strategic move for businesses looking to streamline operations and strengthen their financial position.

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