What is Trade Receivables Discounting System (TReDS)?

In recent years, the financing needs of Micro, Small, and Medium Enterprises (MSMEs) have gained significant attention, particularly due to challenges around liquidity and payment delays. One solution to this issue is the Trade Receivables Discounting System (TReDS), an electronic platform designed to facilitate the financing and discounting of trade receivables for MSMEs. TReDS allows MSMEs to access immediate cash flow by enabling multiple financiers to bid on invoices or bills of exchange due from corporates, government departments, and public sector undertakings (PSUs).

Let’s understand the process of bill discounting on TResDS!

What is Bill Discounting?

Bill discounting is a way for businesses to get quick cash by selling their unpaid invoices to a bank or financial institution. Instead of waiting for the buyer to pay the invoice, the business sells it to the bank, which gives them the money right away (after taking a small fee). Later, the bank collects the full payment from the buyer when it's due. This helps businesses keep their cash flow steady without waiting for payments to come in.

What is TReDS?

TReDS is an electronic platform for facilitating the financing/discounting of trade receivables of Micro, Small, and Medium Enterprises (MSMEs) through multiple financiers. These receivables can be due from corporates and other buyers, including Government Departments and Public Sector Undertakings (PSUs).

Who are the participants in TReDS?

Following are the participants on a TReDS platform:

1. Seller: The person who sells the goods or supplies the services. He has the invoice against which money is receivable.

2. Buyer: The person who buys the goods or services from the seller. He has to pay the liability against the invoice of the seller.

3. Financiers: The person who makes the discounted payment to the seller and recovers such an amount from the buyer later.

Who can participate as a seller, buyer, and financier in TReDS?

‍How does TReDS work?‍

Following is the process of bill discounting on TReDS:

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‍Whether the MSME seller would have to pay the financier in case the buyer defaults in repayment?

‍No. The transactions processed under TReDS are “without recourse” to the MSMEs.

‍Conclusion

‍The Trade Receivables Discounting System (TReDS) is a game-changer for MSMEs, providing them with a seamless and efficient way to manage their working capital. By enabling quick access to funds through invoice discounting, TReDS reduces the financial strain caused by delayed payments and enhances liquidity for small businesses. With a transparent and competitive bidding process among financiers, MSMEs can secure the best financing rates without the burden of repayment in case of buyer default. As more businesses adopt TReDS, it has the potential to strengthen the MSME sector, driving economic growth and financial inclusion.