Last updated on December 24, 2022
- TReDS Full Form
- What is TReDS Portal?
- TReDS Portal: What Is Invoice Discounting?
- What are Operational TReDS Platforms?
- Treds Participants
- Advantages of TReDS Platforms
- Treds Features
- How to avail Working Capital using TReDS?
- Establishment and Operational Criteria for TReDS
- Treds Platform FAQs
TReDS Full Form
TReDS full form is Trade Receivables Discounting System. TReDS is a platform that facilitates the financing / discounting of Micro, Small, and Medium Enterprises (MSMEs) trade receivables through multiple financiers. These receivables may be owed by corporates as well as other buyers, such as government departments and public sector undertakings (PSUs). TReDS in an umbrella term and shouldn’t be confused with “A Treds Limited” which is related to one of the TReDS platforms in India.
What is TReDS Portal?
MSMEs are critical in a developing economy like India. MSMEs must have access to formal sources of low-cost working capital finance in order to add to the GDP of the country. Treds enable MSMEs to secure financing based on the creditworthiness of their buyers without having to negotiate with financiers. TReDS (Trade Receivables Discounting System) plays an important role in ensuring MSMEs’ seamless liquidity and can play a part in filling up the credit gap.
TReDS platform was launched as the Trade Receivables Discounting System by the Reverse Bank of India (RBI) in 2018. TReDS Portals enable MSMEs to receive financing quickly and they also have a lower annual interest payout for SMEs. The platforms’ primary goal is to enable MSME sellers to get short-term finance through invoice discounting against major corporations, allowing them to efficiently manage their working capital requirements.
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TReDS Portal: What Is Invoice Discounting?
Businesses can use invoice discounting to gain immediate access to funds held in outstanding invoices as well as to tap into the value of their sales ledger. The practice of invoice discounting or bills discounting to gain short term finance is long standing and has been perfected over several decades.
At its core, bills discounting is quite simple: when a business raises an invoice against a customer or client, it usually gets the payment with a time lag that can stretch to 60 or 90 days. During this phase, the business can get short term funding against the bills it has raised to credible customers. The lenders in a bills discounting transaction pays the business a percentage of the bill amount, increasing the business’ cash flow. This helps them to keep the working capital moving.
Invoice discounting is also referred to as a series of short-term business loans secured by invoices. In other words, the lender knows you are likely to get the money against the invoice and is willing to lend you the majority of it before your customer pays you.
Small-to-medium-sized businesses’ cash flow may be stressed while waiting for clients to pay invoices. This problem can be effectively solved through invoice discounting with Treds portal.
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What are Operational TReDS Platforms?
The central bank first introduced guidelines for setting up and operating TReDS in 2014. Following that, the government granted permission and licenses to three platforms that can use the Treds mechanism in 2017.
The three operational TReDS platforms in India are:
1. RXIL (a joint venture of NSE and SIDBI)
2. Mynd Solution’s M1Xchange
3. Invoice Mart (owned by A TReDS Limited – a joint venture between Axis Bank and mjunction services)
|Buyer||Corporates including companies and other buyers including Government Departments and Public Sector Undertakings and such other entities as may be permitted by the RBI.|
|Seller||MSME entities as per the definition of the Micro, Small and Medium Enterprises Development Act, 2006 (MSMED Act).|
|Financier||Banks, NBFC Factors, Financial Institutions and such other Institutions as permitted by the RBI.|
Advantages of TReDS Platforms
Benefits To Buyers
- Proper tracking of cash flow
- Treds platform ensures that payment cycles run smoothly with minimal errors
- Treds enables minimal paperwork & transparency
- Better negotiation with MSME vendors
- Lower administrative cost
- Compliant with MSMED Act, 2006
Benefits To Sellers
- MSMEs have the option to choose the best bid
- Treds platform helps in eliminating the funnel of following up with buyer for payment
- Wider financial options
- Treds portal allows T+1 payment on successful auction
- It only takes a small amount of paperwork and money
Benefits To Financier
- The Financer may be able to access a larger market
- Treds platform ensures that instruments are qualified
- Treds portal facilitates lowers operational costs
- Treds platform is automated and digital
- One can finish all transactions online
- Quick access to funds without the need for paperwork
- Streamlined procedures and policies to ensure a smooth flow
- Discount rates that are competitive and appealing
- Zero Collateral – working capital without putting up any collateral
- Working capital in as little as 72 hours. This helps to shorten cash cycles because invoice discounting allows obtaining working capital quickly.
- Everything is done off-balance-sheet. As a result, using collateral-free invoice discounting has no negative impact on financial books that is balance sheet.
- Easy access of working capital aids in the expansion and growth of MSMEs
How to avail Working Capital using TReDS?
- Small businesses can use the TReDS mechanism to raise capital by auctioning off their trade receivables.
- Before the buyer pays, a finance provider or a bank (basically the vendor) bids on an MSME’s bills before the due date.
- Following that, the working capital is transferred to the MSMEs account.
Establishment and Operational Criteria for TReDS
To operate and manage TReDS services, an entity must first meet certain requirements as follows:
- Budget Requirements
- Since Treds is not authorized to take up credit risk, the minimum paid-up equity (capital) requirement is INR 25 crores.
- Other than the promoters, no entity will be permitted to own more than 10% of the TReDS’ equity capital.
- In the case of foreign ownership, the Treds will be subject to and governed by the current foreign investment policy.
- Due Diligence of Promoters
- According to the SEBI’s Issue of Capital and Disclosure requirements regulation from 2009, any organization (or their promoters) serving as Treds must be ‘fit and suitable.’
- The applicants’ status will be evaluated by the RBI based on their previous records (sound financial credentials and record integrity) for at least 5 years.
- Other enforcement/regulatory agencies, such as the CBI, the Income Tax Department, the Enforcement Directorate, and the SEBI, may also request feedback on the candidates who have applied.
- Technology Capabilities
- To ensure smooth operations, the Treds must have strong technical capabilities. It must be able to provide all of its participants with a digital platform.
- It should have a proper business plan in place that includes surveillance capabilities as well as a disaster recovery site that monitors all data such as prices, positions, and volumes to ensure no system manipulation occurs.
Treds Platform FAQs
What is a TReDS portal?
TReDS portal enables MSMEs to get short-term finance through invoice discounting against major corporations, allowing them to efficiently manage their working capital requirements.
How many TReDS platforms are operational in India?
Currently, India has three operational TReDS platforms (i) RXIL (ii) M1Xchange and (iii) InvoiceMart.
What are capital requirements for TReDS platforms?
Minimum paid-up equity capital requirement for setting up a TReDS platform is INR 25 crores.
What is TReDS full form?
TReDS full form is Trade Receivables Discounting System and the system facilitates credit availability to MSMEs.
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