MSME suppliers who supply goods and services to buyers have always been at the receiving end of the inconvenient trade practices by large corporate houses and find it very hard to convert their trade receivables into liquid funds. RBI has come forward to give an effective solution to the pan-India issue and has defined TReDS as the institutional mechanism for financing of trade receivables of MSMEs from corporate buyers through two or more financiers. TReDS is equipped to deal with both receivables factoring as well as reverse factoring to facilitate higher transaction volumes and better pricing.
On M1 Exchange, the supplier, after delivering its goods/services raises an invoice of the receivables which the buyer is due to pay. Post that, the supplier logs in to M1 and uploads the invoice awaiting buyer's approval. Once the buyer approves, the finaciers bid against the invoice and the supplier has the freedom to chose the best bid and receive the payement in his account in T+2 days.
MSME suppliers enjoys a host of benefits with the implementation of TReDS. The most notable one is easy and quick invoices/bills discounting at competitive rates. The financing is 'without recourse' to the MSME suppliers. Also, virtual account payments eliminates cash application, discrepancy resolution and collection costs.
M1 Exchange - the TReDS platform simplifies business for suppliers by a substantial margin. SMEs can now operate without facing any irregular flow of their operational funds. TReDS is an easy and quick means to finance receivables at convenient rates for vendors/suppliers. It ensures faster realisation of the financing needs of the Micro, Small and Medium Enterprises segment. M1 Exchange also gives the supplier a flexibility to select the best trade receivables financing services entity (Bank/NBFC) for bill discounting, invoice factoring and financing.
One major issue which TReDS tackles for business owners is that it enhances liquidity. Meaning, the amount in receivables will be converted to currency sooner which otherwise would have been absorbed for a longer period in the debtor's (buyer) account book. The buyer benefits by earning a cash discount from the vendors as they get substantial savings in interest cost basis buyer's credit rating. Continual application of this process leads to a better receivables cycle too which results in better relationship building between buyers and suppliers.
The other benefits include without-recourse financing and hassle free and paper less documentation. Suppliers enjoy better working capital management all the while increasing the options of expanding the business faster.
If the buyer has a payment term of 30 days with a Small or Medium Enterprise (SME) then, on the 30th day, the buyer will have the option for Reverse factoring his Invoices via TReDS, by doing this, the buyer will get an extended Credit period to make the payment and the SME will get payment on time. Note – However, the Creditor will continue to appear in the Stock statement of the Buyer and may impact MPBF (Maximum permissible bank Finance)
Referring to the same above example, Banks can give unadvised lines to the Buyer which ultimately would not appear in books, this can be possible in the case of Highly Rated Buyers. Note: Depends on the Bank & Buyer relation and market standing of the buyer, also the appetite of the Bank.
Since Micro,Small and Medium Enterprpises (MSME's) do not get funds at low costs,as a result, the per unit cost increases to the Buyer. Therefore,if on acceptance of the corporate buyer, the MSME is will get finance at cheaper rate, the corporate buyer would surely show interest in getting this benefit indirectly. This will benefit both corporate buyers & MSME, because corporate buyers can negotiate at a better rate per unit and MSME would have his collateral freed as he will have the unadvised lines.