Micro, Small, and Medium Enterprises (MSMEs), played the important role in the economy, they continue to face constraints in obtaining adequate finance, particularly in terms of their ability to convert their trade receivables into liquid funds.
For Financing related issues, RBI (Reserve Bank of India) in 2014 introduced the TReDS scheme. TReDS stands for “Trade Receivables Discounting System” is a welcoming step by the RBI to regulate the trade receivables between MSMEs, large corporates, and financiers. This is beneficial not only for these individual players, except for the whole economy of the state.
TReDS is an online platform for facilitating the financing or discounting of trade receivables of Micro, Small and Medium Enterprises (MSMEs) through multiple financiers. These receivables are often due from corporates and other buyers, including Government Departments and Public Sector Undertakings (PSUs).
The Reserve Bank of India granted approval to Mynd Solutions Pvt Limited to line up and operate M1xchange, the primary trade receivable exchange in India. M1xchange has digitally transformed the method of gaining access to working capital for MSMEs via invoice discounting through multiple financiers. TReDS is an answer to the everlasting cash flow issues of the MSMEs in India and an effective solution to drive the MSME sector to the next phase of the Indian economy.
How TReDS works ?
In the process of bill discounting, MSMEs (Supplier) can upload their invoices on any Trade Receivable Exchange of their choice. The invoice is then verified and approved by the Company (Buyer). After the invoice is approved, the Financiers (NBFC/Banks) bid against the uploaded invoice. This unique bidding mechanism gives the supplier a choice to select the foremost suitable bid. The exchange calculates the ultimate transaction amount and funds get transferred from Financier’s bank account to the Supplier’s account. The amount is later paid to the financier by the buyer on the mutually agreed terms.
For bill discounting on a TReDS platform, there are two methods Factoring & Reverse Factoring. Both of those methods are designed to hurry up the seller payment process without disturbing the balance sheet of any stakeholder.
Factoring Method :-
In Factoring Method, the Supplier issue the invoice, and the Buyer verifies the same. This enables the financiers which also are the invoice factoring company to bid against the verified and approved invoice. Once the supplier accepts the bid, the payment is processed in T+1 days. TReDS gives this flexibility to the Suppliers to settle on the best factoring companies on diverse parameters like transparency, customer confidentiality, factoring rates & fees.
In Reverse Factoring, the flow of funds is the same as Factoring Method, i.e. from Buyer to Supplier. But, during this process, the Buyer floats an invoice, and therefore the Supplier verifies and approves the same to initiate the bidding process. Once the supplier accepts the bid, the payment is processed in T+1 days.