The biggest challenge that an MSME or a Startup faces if of liquidity of Funds, which is the most important aspect of running the business seamlessly. New enterprises do not have the privilege of enjoying the usual Credit terms which an established organisation does. In fact they usually work by paying advance for procuring goods and services required for their deliverables. In such a situation, a product like bill discounting is no less than a boon to them. Bill discounting is not a new method of short term financing, however, the availability of a digital platform for the same has made it far more accessible for the businesses today. A synopsis of online bill discounting is given below:

What is TReDS?

Trade Receivables Discounting System (TReDS) is a digital platform for MSMEs to auction their trade receivables at competitive rates through online bidding by Financiers i.e Banks. It is a source for lower cost of financing as financing is based on buyer’s credit profile.

For On-boarding and Operating, all the participants need to register on the platform. KYC documentation is to be done. An agreement is drawn up amongst the participants with all the relevant terms and conditions.
There would be a one-time agreement drawn up amongst the participants in the TReDS.
For MSMEs, this online trading platform provides hassle free process to get financing at best rates. The improved liquidity will result in efficient working capital management with low administrative / operational costs involved.

Who can Register?

• Sellers – The Sellers should be a MSME as defined under Section 7 of the Micro, Small and Medium Enterprises Development Act, 2006 (“MSMED Act”), supplying goods and / or services to buyers.
• Buyers – Corporates including companies and other buyers including Government Departments and Public Sector Undertaking and such other entities as may be permitted by the Reserve Bank of India (“RBI”) from time to time to participate on the TReDS platform as buyers.
• Financiers – Banks, NBFC Factors, and such other institutions as may be permitted by RBI from time to time to participate in the TReDS platform as Financiers.

Why TReDS?

• Benefits to Sellers
– Best discount rate due to participation of Multiple Financiers in auction.
– Efficient capital deployment
– Timely receipt of funds
– Cost & paperwork reduction
– Helpful in Business growth due to improved liquidity
– Increased Transparency

• Benefits to Buyers:
– Compliance with MSMED Act, 2006.
– Efficient cash flow management
– Efficient payment cycles
– Cost & paperwork reduction
– Increased Transparency

Who can initiate the transaction?

Either the Seller or the Buyer can initiate the transaction for financing of Trade Receivables of MSME Sellers. When the MSME Seller uploads the invoices and bears the interest cost it is termed as “Factoring”. In case of “Reverse Factoring” the Buyer initiates the transactions and the interest cost also may be borne by the buyer.

How does it work?

What are the options available for such platforms?

• RXIL – JV of NSE and SIDBI – https://www.rxil.in/
• KredX – Investors – Tiger Global, Sequoia, Prime Venture Partners – https://www.kredx.com/
• M1Exchange – Owend by Mynd Integrated Solutions Pvt. Ltd. – https://www.m1xchange.com/

We hope the above note would have provided the right amount of insight on the trending subject.

Happy Learning!!!