- TReDS Full Form
- What is TReDS Portal?
- What Is Invoice Discounting with TReDS?
- 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
The full form of TReDS is Trade Receivables Discounting System. TReDS serves as a platform that enables the financing/discounting of trade receivables for Micro, Small, and Medium Enterprises (MSMEs) through multiple financiers. These receivables may be owed by various entities, including corporates, government departments, and public sector undertakings (PSUs). It’s essential to note that TReDS is an umbrella term and should not be confused with “A Treds Limited,” which is associated with one of the TReDS platforms in India.
What is TReDS Portal?
In a developing economy like India, MSMEs play a critical role. These enterprises are essential for contributing to the country’s GDP. To achieve this and thrive, MSMEs require access to formal sources of low-cost working capital finance. TReDS (Trade Receivables Discounting System) facilitates this process by allowing MSMEs to secure financing based on the creditworthiness of their buyers, eliminating the need to negotiate directly with financiers. By doing so, TReDS ensures a seamless liquidity flow for MSMEs and contributes to filling the credit gap.
The TReDS platform was introduced by the Reserve Bank of India (RBI) in 2018 as the Trade Receivables Discounting System. Through TReDS portals, MSMEs can quickly access financing with lower annual interest payouts, specifically designed for SMEs. The primary objective of these platforms is to provide MSME sellers with short-term finance through invoice discounting against major corporations, thus helping them efficiently manage their working capital requirements.
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What Is Invoice Discounting with TReDS?
Businesses can utilize invoice discounting as a means to promptly access funds tied up in outstanding invoices and leverage the value of their sales ledger. This practice, commonly known as invoice discounting or bill discounting, has been honed over several decades.
At its core, bill discounting is straightforward: when a business issues an invoice to a customer or client, it often faces a payment delay that can extend up to 60 or 90 days. During this period, the business can obtain short-term financing against the invoices raised for trustworthy customers. In a bills discounting transaction, lenders provide the business with a percentage of the invoice amount, bolstering the company’s cash flow and enabling a smoother movement of working capital.
Invoice discounting is akin to a series of short-term business loans secured by invoices. In essence, the lender acknowledges that you are likely to receive payment against the invoice and is willing to advance a significant portion of it before the customer settles the payment.
For small-to-medium-sized businesses, waiting for clients to pay invoices can strain cash flow. Invoice discounting through the TReDS portal offers an effective solution to address this issue.
What are Operational TReDS Platforms?
The central bank initially issued guidelines for establishing and running TReDS in 2014. Subsequently, in 2017, the government authorized and granted licenses to three platforms to utilize the TReDS mechanism in India.
The three active 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 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.
- Smooth payment cycles with minimal errors.
- Minimal paperwork and enhanced transparency.
- Improved negotiation with MSME vendors.
- Lower administrative costs.
- Compliance with the MSMED Act, 2006.
Benefits To Sellers
- Flexibility for MSMEs to choose the best bid for their trade receivables.
- Elimination of the need to follow up with buyers for payment, streamlining the process.
- Access to a wider range of financial options.
- Quick payment on successful auction, typically within T+1 day.
- Minimal paperwork and financial investment are required.
Benefits To Financier
- Access to a larger market for financing opportunities.
- Assurance that the trade instruments are qualified and credible.
- Facilitation of lower operational costs, making the financing process more efficient.
The TReDS platform offers the following features:
- Automation and digitization of processes.
- Completion of all transactions online.
- Quick access to funds without the need for extensive paperwork.
- Streamlined procedures and policies for a smooth flow of operations.
- Competitive and attractive discount rates.
- Zero collateral is required, providing working capital without pledging any assets.
- Working capital can be obtained in as little as 72 hours, shortening cash cycles through quick access to funds.
- Off-balance-sheet transactions, ensuring no negative impact on financial books (balance sheet) when using collateral-free invoice discounting.
- Easy access to working capital, supporting 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 establish and operate TReDS services, an entity must fulfill specific criteria as follows:
Budget Requirements: TReDS must have a minimum paid-up equity (capital) of INR 25 crores since it is not authorized to take up credit risk. No single entity, other than the promoters, can own more than 10% of the TReDS’ equity capital. If there is foreign ownership, the TReDS will be subject to and governed by the current foreign investment policy.
Due Diligence of Promoters: According to SEBI’s Issue of Capital and Disclosure requirements regulation from 2009, any organization or its promoters aiming to serve as TReDS must be deemed “fit and suitable.” The RBI evaluates the applicants’ status based on their past records, including sound financial credentials and record integrity, for a minimum of 5 years. Other enforcement/regulatory agencies, such as the CBI, the Income Tax Department, the Enforcement Directorate, and SEBI, may also provide feedback on the applicants.
Technology Capabilities: To ensure smooth operations, TReDS must possess robust technical capabilities. It must offer all participants a digital platform. The TReDS should have a well-structured business plan that includes surveillance capabilities and a disaster recovery site, ensuring data monitoring for prices, positions, and volumes to prevent system manipulation.
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.