How TReDS invoice discounting works for a Pvt Ltd supplier
TReDS invoice discounting works for Pvt Ltd suppliers. Suppliers can sell accepted invoices on a TReDS platform and receive payment within two working days.
CA Harun Raaj
pvtltd.co
A Pvt Ltd company registered as an MSME can sell an accepted invoice drawn on a corporate or government buyer on a Trade Receivables Discounting System (TReDS) platform, and have the money credited to its account on a T+2 basis after it accepts a financier's bid. Financiers on the platform quote competing prices for the receivable, and the transaction is "without recourse" to the MSME seller (RBI, Guidelines for the Trade Receivables Discounting System, updated as on 2 July 2018, paras 5 and Annex (n)).
Legal basis: RBI Guidelines for the Trade Receivables Discounting System (TReDS), updated as on 2 July 2018; TReDS operates as an authorised payment system under the Payment and Settlement Systems Act, 2007 (para 21). Micro, Small and Medium Enterprises Development Act, 2006, sections 15, 16 and 22.
The scenario every supplier recognises
Your company makes precision components for a listed auto manufacturer. The purchase order is ₹38 lakh. The buyer's payment terms: 60 days from invoice date. Your payroll runs in 12 days. Your existing overdraft limit is already drawn 80 per cent.
Without TReDS, your choices are: pay interest on a costly short-term loan, ask your own suppliers to extend credit, or delay payroll. With TReDS, once your buyer accepts the invoice on the platform, it can be financed and the proceeds credited to you within two working days of your accepting a bid.
This is not a loan against the invoice. The RBI guidelines describe it as discounting of the receivable, and transactions on TReDS are "without recourse" to the MSME (para 5). If the buyer does not pay on the due date, that is a default by the buyer, and any action taken is "strictly non-recourse with respect to the MSME sellers" (Annex (q)). This is what makes TReDS different from a bank overdraft or bill discounting with recourse.
What is TReDS and how does the three-party mechanism work?
The RBI set out the TReDS scheme to finance the trade receivables of MSMEs from corporate and other buyers, including Government Departments and PSUs, through multiple financiers (para 3). Three parties participate directly (para 7):
The supplier: an MSME seller that has delivered goods or services and raised an invoice or bill on the buyer.
The buyer: the corporate, Government Department or PSU that bought the goods or services and accepts the invoice on the platform.
The financier: a bank, NBFC Factor or other financial institution permitted by the RBI, which bids to finance the receivable (para 6(b)).
The transaction sequence (Annex):
- Supplier creates a "factoring unit" on the platform from the invoice or bill after delivery (Annex (c)).
- Buyer logs in and flags the factoring unit as "accepted" within the time window the platform sets (Annex (c), (e)).
- The accepted factoring unit is open to financing by any financier registered on the platform. Financiers quote an all-in cost, visible only to the MSME seller (Annex (k)).
- Supplier accepts any bid it chooses; once accepted, the financier cannot revise it (Annex (l), (m)).
- The financier credits the supplier's account on a T+2 basis, T being the date of bid acceptance (Annex (n)).
- On the due date, the buyer pays the financier (Annex (p)).
The supplier is paid at step 5. Step 6 involves only the buyer and the financier.
The TReDS platforms
TReDS platforms are operated by entities authorised by the RBI under the Payment and Settlement Systems Act, 2007 (para 21). A supplier can deal on more than one platform where its buyers are registered on different ones. Check the RBI's current list of authorised payment system operators before registering.
Who qualifies as a supplier on TReDS
The RBI guidelines make MSME sellers the supplier-side participants (para 7). Before registering on any platform, confirm your Udyam Registration at udyamregistration.gov.in.
MSME classification uses composite criteria of investment in plant and machinery or equipment and annual turnover, under the Ministry of MSME notification S.O. 2119(E) dated 26 June 2020 as amended. The thresholds have been revised since that notification; check the current limits on the Udyam portal rather than relying on figures quoted in older material. Update your Udyam profile when your figures change, because platforms on-board sellers through a KYC process (para 13).
Your buyer's payment obligations under the MSMED Act
If your company is a micro or small enterprise (the Act defines a "supplier" as a micro or small enterprise, section 2), the Act gives you protection that works alongside TReDS:
- Section 15: the buyer must pay on or before the agreed date, and the agreed period cannot exceed 45 days from the day of acceptance or deemed acceptance.
- Section 16: if the buyer pays late, it owes compound interest with monthly rests at three times the bank rate notified by the RBI.
- Section 22: a buyer whose accounts must be audited has to disclose in its annual accounts the principal and interest remaining unpaid to such suppliers at year end, and interest paid or payable for delay.
These provisions apply to micro and small suppliers, not to medium enterprises.
Comparison: TReDS vs bank bill discounting vs factoring
One point to plan for: when you on-board, you declare that the goods and services behind a factoring unit are not financed by, or charged to, your working capital bank (para 15(c)). Your banker may also be informed of financed units and may adjust the proceeds against your working capital account (Annex (o)). Discuss TReDS use with your working capital banker before you start.
For a broader overview of working capital and business finance options, see the pvtltd.co services page.
Step-by-step: getting started on TReDS as a supplier
Step 1: Verify your Udyam Registration.
Log into udyamregistration.gov.in and confirm your registration is active and reflects your current investment and turnover figures.
Step 2: Confirm which platform your buyer is registered on.
Ask your buyer's accounts payable or treasury team. Acceptance of the invoice has to happen on the same platform where you create the factoring unit.
Step 3: Register on the platform.
On-boarding is a one-time process: the platform collects KYC documents and resolutions or documents naming your authorised personnel, who get multi-level user IDs (para 13). You also sign a master agreement with the platform (para 15(c)).
Step 4: Create the factoring unit after delivery.
Upload the invoice or bill and, where the platform asks, documents evidencing movement of goods (Annex (d)).
Step 5: Wait for buyer acceptance.
The buyer must flag the factoring unit as accepted within the platform's time window (Annex (e)). Without acceptance, financiers cannot finance it. Follow up with your buyer's accounts payable team if acceptance is slow.
Step 6: Review bids and select.
Compare the all-in costs quoted and accept the bid you prefer (Annex (k), (m)).
Step 7: Receive funds.
The financier credits your account on a T+2 basis (Annex (n)). The buyer settles with the financier on the due date. If a factoring unit is never financed, the buyer pays you outside TReDS (Annex (u)).
For help keeping your invoice records, GST reconciliation, and receivables ledger in order before approaching TReDS, see bookkeeping and accounting services.
Accounting treatment
On the invoice itself: The factoring unit is created from the tax invoice you have already raised on the buyer. You do not issue a fresh invoice when it is financed.
In your books: Debit bank (net proceeds), debit financing cost (the discount), credit trade receivables (full face value). Confirm derecognition of the receivable against the accounting standard that applies to your company.
For assistance with month-end accounting and invoice discounting via TReDS, pvtltd.co can help you set up the bookkeeping from the first transaction.
FAQ
Q: We have outgrown the micro category. Can we still use TReDS?
A: The RBI guidelines admit MSME sellers (para 7), which covers micro, small and medium enterprises. Check your current classification on the Udyam portal. Note that the MSMED Act payment protections in sections 15 to 22 apply only to micro and small suppliers.
Q: Our buyer says they are not registered on TReDS. What can we do?
A: You cannot discount an invoice on TReDS unless the buyer accepts it on the platform. If you are a micro or small enterprise, the MSMED Act still requires payment within the agreed period, capped at 45 days (section 15), with interest for delay (section 16), and the buyer must disclose unpaid amounts in its audited accounts (section 22).
Q: Does TReDS affect our bank limits?
A: It can. You declare that the goods and services behind a factoring unit are not charged to your working capital bank (para 15(c)), and your bank is notified of financed units and may adjust proceeds against your working capital account (Annex (o)). Speak to your banker first.
Q: What if the buyer rejects our invoice on the platform?
A: Without buyer acceptance there is no factoring unit to finance. The buyer's master agreement with the platform says that once a unit is accepted online, the buyer must pay on the due date with no recourse to disputes about quality of goods (para 15(b)), so disputes have to be settled before acceptance. TReDS platforms must also have an arbitration and grievance redressal mechanism (para 20). Keep written delivery acknowledgements before you upload.
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Sources
- RBI, Guidelines for the Trade Receivables Discounting System (TReDS), updated as on 2 July 2018 — https://www.rbi.org.in
- Micro, Small and Medium Enterprises Development Act, 2006, sections 2, 15, 16 and 22
- Ministry of MSME notification S.O. 2119(E) dated 26 June 2020 (Udyam classification), as amended — https://udyamregistration.gov.in
For a compliance review of your company, visit pvtltd.co/services/annual-compliance-package.
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See Also
Next steps on MSME payments
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