The role of TReDS in easing the working capital requirements of MSMEs and its impact on the profitability and competitiveness of MSMEs

By Madhusmita Panda
Posted On March 5, 2025

Micro, Small, and Medium Enterprises (MSMEs) set the tone for any economy’s growth. Their contribution to GDP, employment, and industrial output is undisputed. Still, MSMEs often struggle with cash flow issues due to delayed payments from buyers, leading to working capital shortages that stall growth. To arrest this long pending problem the Trade Receivables Discounting System (TReDS) has been brought in by the RBI. It is positively changing and streamlining how MSMEs manage their working capital needs.

What Is TReDS And How It Works

TReDS is an RBI-regulated online platform. It facilitates financing of trade receivables for MSMEs. On a TReDS platform sellers (MSMEs), buyers (corporates, PSUs, and government departments), and financiers (banks and NBFCs) engage with each other to discount invoices and free up working capital.

The TReDS platform works to instill transparency and efficiency by bringing seller, buyer and financier all on one platform.

Factoring vs. Reverse Factoring On TReDS

TReDS supports two primary financing models:

  1. Factoring (Seller-Initiated Financing): Here. the seller uploads the invoice, and financiers bid to provide upfront funds. The seller selects the best bid, receives early payment, and the financier later collects the dues from the buyer at maturity.
  2. Reverse Factoring (Buyer-Initiated Financing): Here, the buyer approves the invoice first, assuring financiers of its authenticity. The financier then directly pays the seller on behalf of the buyer, and the buyer repays the financier at the agreed-upon due date.

TReDS Functioning Guide

  1. Seller uploads an invoice – The seller delivers goods or services to a buyer, and then uploads the invoice of the goods or services rendered on the TReDS platform.
  2. Buyer approves the invoice – The buyer approves the uploaded invoice on the TReDS platform itself, confirming its authenticity.
  3. Financiers bid on the invoice – Multiple financiers bid to discount the invoice, ensuring competitive rates.
  4. Acceptance of bid – The seller accepts the best bid. As per the bid, the funds are credited to the seller’s account, providing him with working capital.
  5. Buyer repays the financier – The buyer settles the payment with the financier at the due date.

TReDS – Solving Working Capital Challenges For MSMEs

Delayed payments can choke any MSMEs. More often than not, large corporates operate on extended credit cycles, furthering the gap between receivables and operational expenses for MSMEs. Here’s how TReDS helps mitigate these challenges:

  • Better cash flow for MSMEs – MSMEs can encash their invoices early and get working capital to sustain and expand their operations.
  • Access to multiple financiers – TReDS allows MSMEs to access multiple financiers, through the platform itself, increasing their chances of securing favourable terms.
  • Competitive rates – As multiple financiers bid on the same invoice, sellers gain the most and also get competitive discount rates, reducing financing costs.

TReDS – Improving Buyer – Supplier Relationships And Cash Flow Management

TReDS encapsulates several advantages for corporates, apart from supporting their MSME partners. Buyers are important cog of this wheel and by leveraging the TReDS platform, they can:

  • Complying with regulatory mandates – RBI has mandated TReDS onboarding for corporates having revenue of INR 250 crore and over.
  • Improve seller relationships – Timely payments lead to better partnerships and improved trust.
  • Optimise cash flow – Financier pays the MSME immediately and the buyer settles the invoice at a later date. This allows buyers to manage their cash flow efficiently without impacting operational expenses.

TReDS – Giving Greater Foothold To Financiers 

Financiers stand to benefit the most from the TReDS platform. MSME lending has always been a high-risk segment due to the lack of collateral and credit history. But, with TReDS this dynamic has changed, as it offers:

  • Lower risk lending – The invoice is approved by a corporate buyer which in turn make financiers face lower credit risk.
  • Diversified lending portfolio – TReDS provides financiers access to a wide range of MSMEs across various industries, helping them diversify their lending portfolio.
  • Competitive bidding – Financiers have the liberty to choose the most suitable invoices to discount, ensuring risk-reward balance.

The Future of TReDS and MSME Financing

With regulatory support and GOI’s push the adoption of TReDS is steadily rising. As more corporates, MSMEs, and financiers adopt this system, it will bring more ease in invoice financing in India and beyond. TReDS portal will soon redefine the way businesses are handling trade receivables.

The time to get onboarded on TReDS is now. Register today and comply with RBI guidelines and leverage the benefits of TReDS. Drive a new growth story filled with ease, transparency, and financial efficiency in your business.