The Trade Receivables Discounting System (TReDS) is an MSME program that acquires trade accounts receivable from corporate funds and other buyers (including government agencies and public sector entities) to aid MSMEs. TReDS plans the establishment and implementation of the funding processes for MSMEs.
Small and medium-sized businesses have shallow profit margins and need to receive goods immediately to avoid a lack of money. In the absence of bargaining power on SMEs, their working capital is typically tied to commercial claims as they operate in an unorganised cycle of loans and services offered to business buyers. The goal of TReDS is simply to fight the loopholes in the system for small businesses.
TReDS is primarily an electronic institutional mechanism for providing multi-donor funding to eligible MSMEs.
These are the main features of TReDS:
An integrated platform for buyers and sellers
Removes the paperwork
Easy access to money
Competitive discount price
Smooth data flow
Barriers to TReDS
In India, the invoice discount has not seamlessly been introduced as a financing mechanism. There can be many reasons for this, including:
The negotiating position is biased when the company’s buyer expresses concern and states that the acceptance of the financing is favourable.
Securing information makes it difficult for funders to determine the reliability of MSMEs.
Banks are the largest entities in the discount sector, and there are few discount companies.
MSMEs do not understand exceptional services, especially in non-urban areas.
The Purpose of TReDS
TReDS tries to balance information and manage high rates offered by financiers. Its goal is to shorten the payment term for suppliers. The platform allows large corporations (including government agencies and suppliers) to reduce the accounts of MSME resellers through an auction mechanism to ensure the quick identification of the recipients of transactions at competitive market prices.
Benefits for MSME Suppliers
High discount rate
Efficient use of funds
Timely receipt of funds
Reduced costs and red tape
Expands your business with better liquidity
Technical Solutions to TReDS Challenges
Several technical solutions have also been identified to address the specific challenges of TReDS. Some licensed TReDS exchanges recently got together with MonetaGo, a US-based startup, to implement a blockchain-based solution for a particular problem – the problem of double invoicing and associated fraud. Many other countries, too, are considering blockchain development to address end-to-end billing solutions.
MSMEs can use blockchain to:
Determine the validity of the receipt
Check if their account is already discounted
Create an incentive mechanism to speed up payments
Reduce costs associated with the billing process
TReDS Enables Small Businesses
One of the main concerns of SMEs is the problem of cash flows, which can hinder the growth and expansion of their business. Cash flow problems can have many causes, such as persistent customer delays, use of existing funds for backup purchases, and lack of funds for daily expenses.
But, even during the COVID-19 epidemic, TReDS benefited MSMEs in aiding their cash flows across India. This has served as a game-changer and has remodelled invoice financing in India. In future, it is going to create a low-cost market that promotes smooth traffic and provides competitive funding to foster healthy competition.