Trade Receivable Discount System (TReDS) - R R Padmanabhan, Director - Exim Academy

Trade Receivable Discount System (TReDS) - R R Padmanabhan, Director - Exim Academy

Cash is the lifeblood of any business.  However, profitable the company is, unless the cash cycle is regular, the operations of the company gets hit.  The cash burden is acute for MSME units. It is jocularly said that unit size and cash burden is in inverse proportion always.  Big units have the wherewithal to reach out to sources to tap money. Besides, they employ skilled finance professionals to manage their cash flows.  But MSME does not have such luxury.

The normal sources of funds of MSME are:

a) Internal Generation

b) Bank borrowings

c) Savings of the proprietor

d) Loans from friends and relatives 

e) Chit funds

Many times, when all the above sources are exhausted, the entrepreneur has nowhere to go to meet his fixed expenses.  The expenses have time lines to be met, whereas the accruals do not.  In spite of the MSME Act that prescribes a fixed time limit for payment of outstanding by the big units in case of their procurement from MSME, seldom are they honored.  These units do not have the luxury of resorting to legal action to enforce payment.  Yes, one can enforce such action, but he has to forget getting repeat orders from the same big unit. 

Bank borrowings have a limitation in the sense that beyond sanctioned limit, the unit cannot borrow from the bank under cash credit operations.  But business is dynamic; one may never know when a new order would land up in the table.  One has to be ready to fund the raw material and other operations. The expected payment may not turn up but expenses are certain. Worse, some times, unexpected expense turn up and they have to be met.  In fact, that is what the art of entrepreneurship is!

The hurdles faced by an Entrepreneur are set to reduce/go away with the entry of Invoicemart.  Invoicemart is a joint venture between Axis Bank and mJunction.  It is digital platform bringing suppliers, buyers and financiers in a single platform.  The system works like this:




The supplier shortens his manufacturing cycle time with the infusion of cash in to the system. The cash infusion brings in more business and more cash and the cycle goes on enlarging.

The important features of the system are:

•Leverage credit profile for the best cost of funds


 •Everyone, seller, buyer and financier wins!
 •Financier: The financing is under priority sector lending
 •Buyer: He enjoys credit period not from the seller but from the
   financier. He satisfies MSME act provisions that requires him to pay within 45 days
 •Seller: The finance is off Balance sheet and thus not covered under Cash Credit of Bank.

    In the website of TReDS, for a question on how Invoicemart is different from other traditional invoice discounting, the response is as below:

Traditional invoice discounting usually involves a tripartite agreement between a buyer, seller and financier. Thus every buyer-seller-financier combination requires a different agreement, which is cumbersome.

·        With TReDS, every participant has to sign a one-time agreement with the platform itself. Businesses, thus, can focus on carrying out the factoring transaction without worrying about the administrative complexities;

·        By providing an auction-based platform involving multiple financiers, TReDS ensures that the MSME sellers receive funds at the most competitive rates in the market – in other words, it enables efficient price discovery;

·        TReDS offers a digital platform for factoring and reverse factoring, which makes it fast, efficient and convenient to use;

·        It can be integrated with the existing ERP system of buyers/sellers, enabling automatic uploading of invoices and subsequent settlements.

 

Regards,

R R Padmanabhan

Director - Exim Academy

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