Why TReDS is an Advanced Digital Solution over Traditional Invoice Discounting

In an evolving business ecosystem, effective working capital management is critical for sustained business growth and operational resilience. Micro, Small, and Medium Enterprises (MSMEs) frequently face cash flow challenges due to delayed payments from buyers, which strains the supply chains. The blog explores how transitioning from traditional invoice discounting to TReDS unlocks faster payments, lowers financing costs, and strengthens supply chain liquidity across the ecosystem.

The Role of RBI in Regulating TReDS

TReDS operates under the regulatory framework of the Reserve Bank of India (RBI) per the Payment and Settlement Systems Act, 2007. RBI’s framework ensures platform compliance, security, and transparency, mandating registration and participation rules for MSMEs, corporates, and financiers. This regulatory governance establishes trust, mitigates risks inherent in informal receivables financing, and standardizes practices across the ecosystem.

What is TReDS and How Does it work

The Trade Receivables Discounting System (TReDS) is an RBI-regulated, digital marketplace designed to facilitate the auction-based discounting of trade receivables specifically for MSMEs. The platform connects MSME sellers, large corporate buyers, and multiple financiers such as banks and NBFCs, enabling sellers to upload invoices electronically, receive competitive bids, and access fast financing without paperwork.

By digitising and centralising trade receivable discounts, TReDS significantly improves cash flow for MSMEs, reduces payment delays, and promotes transparent, competitive financing options.TReDS is designed specifically to help realise payments more quickly by discounting receivables from large buyers such as corporates and government departments. Unlike normal banking channels that offer financial services, TReDS operates as a digital auction marketplace connecting sellers, buyers, and multiple financiers simultaneously.

How does TReDS differ from traditional Invoice Discounting

Unlike traditional invoice discounting where MSMEs often rely on bilateral arrangements with banks or NBFCs, usually against their own credit profile, TReDS (Trade Receivables Discounting System) is a digital, RBI-regulated platform that enables MSMEs to get their approved invoices financed by multiple competing financiers, ensuring faster payments without adding debt to their balance sheet. This leads to lower discounting rates, greater transparency, faster turnaround, and wider access to institutional credit for MSMEs, all within a standardised and regulated framework.

Benefits of TReDS vs Traditional Invoice Discounting: A Quick Comparison

Step-by-step process of TReDS Explained

TReDS operates as a digital auction-based platform regulated by the RBI, enabling MSMEs to access early payments for their invoices through competitive bidding by financiers. Here’s how it works step by step:

1. Registration & Onboarding: MSMEs (sellers), large corporates or PSUs (buyers), and financiers (banks/NBFCs)should register on an RBI-approved TReDS platform
2. Invoice Upload: The Supplier starts by uploading the valid invoice to the platform for discounting.
3. Buyer Validation: The buyer verifies the invoice, confirming its authenticity.
4. Financier Bidding: Multiple financiers bid to offer early payment, creating a marketplace for the best interest rates.
5. Bid Acceptance: The MSME selects the most competitive offer among the bids.
6. Instant Advance: The chosen financier disburses an advance, typically 80–90% of the invoice value to the supplier.
7. Final Settlement: On the invoice’s due date, the buyer pays the full amount directly to the financier, closing the transaction.

Why Transitioning to TReDS Benefits All Stakeholders in the Ecosystem

The Trade Receivables Discounting System (TReDS) is a digital, RBI-regulated platform transforming the financing of trade receivables in India by bridging MSMEs, corporate buyers, and financiers on a unified marketplace. Transitioning to TReDS creates significant benefits across the supply chain, fostering financial inclusion, transparency, and operational efficiency.

For Suppliers:

• Faster Access to Working Capital: By digitising, TReDS enables suppliers to access funds within 24 to 48 hours, dramatically reducing cash flow gaps compared to traditional paper-based processes.
  
• Competitive Financing Rates: The auction-based bidding among multiple financiers ensures MSMEs receive the best possible discount rates, lowering financing costs.
  
• Collateral-Free Financing: Funding on TReDS is based primarily on buyer creditworthiness, relieving MSMEs of collateral requirements that often restrict their borrowing capacity.
  
• Risk Mitigation: TReDS provides “no recourse” financing, shifting the risk of buyer default to financiers without any burden on balance sheets.
  
• Regulatory Compliance & Transparency: The platform’s real-time digital tracking and RBI regulation increase supplier confidence and reduce disputes related to payments.
  

For Buyers:

• Supplier Relationship Strengthening: Timely payments via TReDS help buyers maintain healthy supplier relationships and reduce bottlenecks in the supply chain.
  
• Cost Visibility and Efficiency: Buyers gain greater transparency into invoice verification processes, enabling smoother and error-free payment cycles.
  
• Regulatory Compliance: Using TReDS ensures adherence to MSME payment regulations, particularly the mandated 45-day payment cycle.
  
• Improved Cash Flow Management: Buyers can better manage payables and optimize working capital within regulatory frameworks.
  

For Financiers:

• Access to Larger, Segmented Markets: TReDS broadens financiers reach to MSME invoice financing, providing a new customer base with verified invoices and creditworthy buyers.
  
• Reduced Credit Risk: Since TReDS financing is based on buyer credit, financiers face lower default risk compared to unsecured lending.
  
• Operational Efficiency: The platform’s automation reduces processing time and documentation overhead, leading to lower operational costs.
  
• Competitive Environment: Auction-based bidding fosters price discovery and competitive interest rates, allowing financiers to better manage risk and returns.
  

Leveraging TReDS with KredX’s Domestic Trade Exchange (DTX)

Platforms like KredX DTX augment the TReDS ecosystem by integrating advanced data analytics and expanding financing sources. DTX facilitates seamless invoice discounting, leveraging real-time data to optimise working capital management and liquidity solutions for MSMEs and corporate buyers alike.This integrated approach amplifies benefits, supports wider participation by MSMEs, and  fintech innovation in trade finance. By combining the regulatory framework with platforms like KredX DTX, businesses can unlock significant efficiencies in their working capital cycles.