How Does the Trade Receivables Discounting System (TReDS) Work?

The Trade Receivables Discounting System, aka TReDS, is a business setup in which the micro, small, and medium enterprises (MSMEs) can apply for credit more easily than the traditional loans.

What is TReDS?

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TReDS is an online platform on which the trade receivables are auctioned, a process which is commonly known as bill discounting or invoice discounting. In this, a business owner can sell a bill (invoice) to a financer (a bank or another financial institution) which is due to be a paid at a future date. So, in other words, they get credit (funds) on the basis of the invoice.

A bank gets payment security from the invoice as they know the amount that’s to be paid by the person whose name is on the invoice.

TReDS Participants

There are three main participants in TReDS:

• MSMEs
• Financers
• Corporate Buyers

On the TReDS platform, all three participants are able to come together and facilitate the uploading, accepting, and processing of the invoices for financing and discounting.

As per the RBI guidelines, only MSMEs are allowed to participate in the system as sellers. Non-Banking Financial Companies (NBFC) and Banks can join only as the financers.

How Does it Work?

An MSME seller who seeks funding, can upload an invoice on the platform. A buyer can then accept it upon which it becomes a factoring unit. This factoring unit then goes to auction. This is where the financiers (Banks or NBFCs) come in and offer their discount rate.

Note: A discount rate is the minimum interest rate that a financer can offer. It is also known as the marginal cost of funds-based lending rate (MCLR) which is set by the RBI.

The seller can then accept the discounting rate they are comfortable with. TReDS then facilitates the deal by debiting the financer and transferring the amount to the seller.