The information shared in this blog is applicable only to Indian businesses.
What is TReDS and why was it introduced?
The Trade Receivables Discounting System (TReDS) is a move by the Reserve Bank of India (RBI) to facilitate the financing or 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). It's an easy solution for the problems that MSMEs face due to delayed payments, including:
- Trouble expanding business and taking on new projects due to insufficient working capital
- Inability to meet ongoing operational expenses due to hindered cash flow
- Delay in payments to suppliers leading to poor relationships and low brand reputation
- Inability to meet creditor’s demand, resulting in bad credit ratings and poor future prospects to credit facilities
On November 2, 2018, the Department of Micro, Small and Medium Enterprises made the TReDS platform mandatory for companies with a turnover of more than INR 500 crores. The notice issued stated that all companies registered under the Companies Act, with a turnover of more than INR 500 crores, and all Central Public Sector Enterprises are required to onboard a TReDS platform. This made TReDS registration mandatory for such companies.
The Registrar of Companies (RoC) in every state has been nominated to be the competent authority to monitor compliance with this notification.
- MSMEs get greater access to financing at competitive rates without providing any additional collateral. Also, the financing is without recourse to the MSMEs.
- Corporates save on procurement costs through an improved negotiation of financing terms for their vendors.
- Financiers get an opportunity to build Priority Sector Lending (PSL) asset portfolios on Trade Receivable Exchange platforms like M1xchange that aim to provide MSMEs supply chain related cash flow finances at competitive rates through an open bid process with multiple financiers.
Features of the TReDS
- Unified platform for sellers, buyers, and financiers
- Easy access to funds
- Eliminates paper
- Online transactions
- Competitive discount rates
- Seamless data flow
- Standardized practices
Benefits Of TReDS For MSMEs
- Quicker payments – MSME sellers typically receive funds against approved invoices within 48 hours.
- Multiple financiers – With the TReDS, MSMEs have a broader range of options for their financial needs. They can choose between multiple financiers with the lowest bid.
- Without recourse borrowing – MSMEs are not liable to repay the financier in case the buyer defaults in repayment.
- Lower cost of funds – The TReDs follow a transparent bidding process that allows MSMEs to find the best quote. The seller can access financing at competitive terms as it is based on the credit rating of the buyer.
- Off-balance-sheet financing – The TReDs offers a collateral-free bill discounting service that doesn’t impinge on the balance sheet of the other expenses in the business as it involves the sale of receivables.
- Collateral-free working capital – Sellers can meet working capital requirements using unpaid invoices through bill discounting.
- Business growth – Expanding business horizons becomes easier with timely payments and a consistent record of meeting working capital requirements.
TReDS with M1xchange for Zoho Books
The M1xchange extension for Zoho Books supports Indian businesses with their digitization journey by enabling them to access financing seamlessly and manage their finances through a one-stop digital solution. After installing this extension in Zoho Books, the user can discount their invoices through M1xchange in just a few clicks.
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