In these testing times of the outbreak of COVID-19 pandemic, businesses are the net sufferers. Coming months may see the businesses facing cash crunch and experiencing working capital problems. To counter this, one of the measures that the Government of India has introduced for the Micro, Small and Medium Enterprises (MSME’s) is facilitating finance of trade receivable (debtors) of MSME’s through Trade Receivables Discounting System (TReDS).
How TReDS works?
- Since the facility is available only for an MSME, check whether your business gets classified under MSME (businesses having investment in Plant and Machinery upto Rs. 10 crores, in case of manufacturing, and upto Rs. 5 crores, in case of services, are classified as MSME’s).
- Obtain an Udyog Aadhar Certificate for your business.
- Register your business on either of the following exchanges, by paying the applicable registration fees:
- Receivables Exchange of India Limited (RXIL);
- M1 Xchange
- A Treds
- Once registered on either of the exchanges, the seller can upload the invoice, in respect of which financing is sought
- The uploaded invoice needs to be confirmed by the buyer. Once confirmed, the invoice becomes a factoring unit
- Financiers (Banks/NBFC’s) offer their bids on the uploaded invoice. The seller then accepts the best bid. The seller may also choose to reject all bids.
- Once the bid is accepted, the amount will be credited to the seller’s account within 1-2 working days from bid acceptance date.
- On the due date of payment, the financier shall recover the invoice amount from the buyer.
For example:
A Ltd provides services to B Ltd and raises an invoice worth Rs. 1 crore. A Ltd intends to factor this invoice. Accordingly, A Ltd upload these invoices on the exchange’s platform. Once uploaded, B Ltd, being the buyer, needs to confirm the uploaded invoice. Once confirmed, the uploaded invoice shall become a factoring unit. Banks shall bid for financing the said invoice of Rs. 1 crore – one may bid to offer 99 lakhs, other may bid to offer 99.40 lakhs and so on. The seller may accept the one which bids the highest, say Rs. 99.40 lakhs (Factoring cost = 1 crore – 99.40 lakhs = 60,000). Once accepted, the sum of Rs. 99.40 lakhs gets transferred to the seller’s account in 1-2 working days. On the due date, the buyer shall be required to pay Rs. 1 crore to the bank. Thus, the seller gets Rs. 99.40 lakhs immediately without waiting for the expiry of the due date.
Costs involved:
- Registration fees while registering with either of the 3 exchanges;
- Annual fees at the exchange;
- Factoring cost;
- Brokerage cost payable to the exchange.
Advantages:
- Instant disbursement of funds;
- No requirement of follow-up with debtors;
- Lower cost of funds.
For professional guidance, please do not hesitate to contact us at +91 9699111783 or at raj.sheth@bhaskara.in.