TReDS: Benefits, Mechanism, Advantages

Some of the major companies are dealing with cash constraints. MSMEs in India are also facing a severe cash crunch. The situation is aggravated by the unwillingness of the banks to lend to the “non-reputed” firms during this time. Is your business also a victim of the same phenomenon? Are you also looking around for alternatives to help rescue your business? Well, then TReDs could be a viable option.

Not so aware of what it is? Let us see!

What is TReDS?

As per the definition on RBI’s official website, 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).

To have a better understanding of the definition above, noting the following is important:

• Only MSMEs can participate as sellers in TReDS.
• Corporates, Government Departments, PSUs, and any other entity can participate as buyers in TReDS.
• Banks, NBFC — Factors, and other financial institutions as permitted by the Reserve Bank of India (RBI), can participate as financiers in TReDS.

How does it work?

The electronic platform allows both Factoring and Reverse Factoring. Therefore, to understand the process it is relevant to understand both these terms.

Mechanism of Factoring

Source: Invoicemart

A factoring transaction begins when a seller uploads an invoice on the platform and creates a Factoring Unit (FU). An FU contains necessary details of the invoice in digital format and must be accepted by the buyer before it is sent to financiers for bidding. The seller then chooses the most suitable bid and receives funds from the financier within 48 hours. On the due date of payment, the buyer pays the outstanding amount to the financier. In factoring, the credit is extended to the Supplier based on the buyer’s creditworthiness which means the supplier can enjoy a low cost of funds, which are extended to large corporate buyers, because of their credit rating.

Mechanism of Reverse Factoring

Source: Invoicemart

And a Reverse Factoring transaction begins when a buyer uploads an invoice on the platform, on behalf of the seller and creates a Factoring Unit(FU). The rest of the process remains the same.

Factoring(or reverse Factoring) is not a loan and differs from traditional bank credit. It is a true sale of an asset (invoice in this case) and does not create a liability on the balance sheet. Unlike a bank credit which involves two parties, factoring involves 3- the seller, the buyer, and the factor or the financier.

Benefits of This Platform

For Buyers, TReDS provides the opportunity to ensure timely payment to suppliers without straining their cash reserves. Additionally, through TReDS, buyers can extend the credit period to benefit from longer payable cycles.

For Sellers, TReDS ensures early payment against their receivables, helping them take up and fulfill more orders. Moreover, since TReDS is based on the buyers’ creditworthiness, it offers financing at lower rates of interest than standalone borrowings leading to cost savings. TReDS provides an additional line of credit that sellers can tap onto when needed most to keep their businesses functioning smoothly.

For Financiers, TReDS helps in fulfilling PSL targets more efficiently in less time for the financial institutions. This gives a boost to the banks who at times struggle to fulfill their PSL asset portfolio. Such banks find TReDS to be a key business opportunity in their bid to reach out to more MSME customers. Financiers also get access to a ready-made client base to connect with more bankable leads.

This is it from our side. Do let me know in the comments below if this was educational and helped you become more aware of possible alternatives to help your business get over your cash crunch.

For a better understanding of whether TReDS or other cash management strategies and latest offerings best suited to your business. please feel free to contact my team at +91–8882132258 or drop a mail at connect@dranshuldhingra.com

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