1. Why Working Capital is a Major Challenge for MSMEs

For most MSMEs, the day-to-day challenge isn’t only about generating sales or earning profits it’s about ensuring there’s enough money available to run the business smoothly. One of the biggest stress points is working capital. In many cases, funds get locked up in unpaid invoices. You deliver goods or perform a service, raise an invoice and then wait. Often for 60, 90 or even 120+ days before the client actually pays.

During this waiting period, you still have essential expenses to cover paying salaries, buying raw materials, settling vendor bills, and investing in growth or production. But with money tied up in receivables, you can struggle to meet these obligations on time. This mismatch between when money is earned and when it’s actually received can disrupt operations, slow down growth, reduce competitiveness, and even strain relationships with suppliers and employees.

This cash flow timing mismatch can disrupt operations, stunt growth, reduce competitiveness, and even lead to stress on business relationships. Many MSME owners resort to expensive loans, overdrafts or informal credit to stay afloat.

This problem is particularly acute in India. A large number of MSMEs supply goods and services to big corporates, government departments, and public sector undertakings, which often operate with long credit cycles and delayed payment practices. This means MSMEs wait longer for their money, even though their own business costs cannot wait.

This is where TReDS becomes a true game-changer. It offers a way for MSME owners to convert unpaid invoices into immediate working capital, reduce reliance on costly credit, and keep their businesses running efficiently with better liquidity.

2 What is TReDS and How It Works

TReDS (Trade Receivables Discounting System) is an RBI-regulated digital marketplace designed specifically to help MSMEs unlock working capital tied up in unpaid invoices. It was introduced to address the chronic problem of long payment cycles — where MSMEs often wait 30–90+ days after delivering goods or services before receiving payment. TReDS allows you to convert those invoices into immediate cash flow, so you can keep your business running without unnecessary delays or expensive financing.

At its core, TReDS brings three parties together such as MSMEs (sellers) who raise invoices, Buyers (large corporates, PSUs, government departments) who owe payment, and Financiers (banks, NBFCs) who provide funds in exchange for the invoice.

Here’s how it works in a practical, step-by-step flow:

1. Registration: You register your business on a TReDS platform (such as RXIL, Invoicemart).

2. Upload Invoice: Once you deliver goods or services and raise an invoice, you upload it as a “Factoring Unit” on the platform.

3. Buyer Acceptance: The buyer reviews and accepts the invoice, confirming that the payment obligation is legitimate.

4. Financiers Bid: Multiple banks and NBFCs see the accepted invoice and bid competitively, offering different discount rates for early payment.

5. Early Payment: You choose the best bid and the financier pays you the discounted amount often within 24-48 hours giving you fast access to cash.

6. Settlement: On the original due date, the buyer pays the full invoice amount directly to the financier.

This process transforms your trade receivables into ready cash quickly, reducing your dependency on loans and expensive credit and letting you focus on business growth rather than chasing payments.

3. Practical Benefits of TReDS for MSMEs

When business owners understand how it helps, they can adopt TReDS strategically.

Improves Cash Flow Quickly

Your receivables no longer sit unpaid for months. Upload the invoice, get it accepted, and receive funds swiftly often within days. This directly boosts your liquidity and operating efficiency.

Reduces Financial Stress and Cost

With cash in hand faster, MSMEs avoids costly bridging loans, reduce interest burden on working capital borrowings and also to maintain supplier/vendor relationships without late payments. Because the financing is based on buyers’ creditworthiness, you don’t need your own assets pledged.

Strengthens Business Relationships

Reliable cash flow means you are less likely to delay your own payables. Happy vendors and suppliers mean smoother supply operations a win-win for your entire value chain.Also, because TReDS is transparent and digital, buyers have clarity and trust in the process, fostering stronger commercial engagements.

Encourages Formalisation & Credit Culture

TReDS promotes the digital record-keeping, formal financing processes and an integration with government procurement systems like GeM(Government e-Marketplace).

These help MSMEs move from informal credit routes to formal financial ecosystems, improving credit history and future financing access.

4. Government Reforms and Roadblocks: Strengthening TReDS for Faster MSME Working Capital

Recent policy initiatives in India have significantly strengthened the impact of TReDS, making it an increasingly powerful working capital solution for MSMEs. One of the most important developments is the mandatory adoption of TReDS by large buyers. Budget announcements now require companies above a specified turnover threshold to onboard onto TReDS for MSME payments. This move increases buyer participation, improves invoice acceptance rates, and accelerates the flow of funds to smaller businesses. Additionally, the integration of TReDS with the Government e-Marketplace (GeM) has enhanced transparency and visibility of MSME invoices, enabling banks and NBFCs to assess risk more efficiently and release funds faster. Proposed credit guarantee mechanisms further strengthen the ecosystem by reducing risk for financiers, which can lead to lower discounting rates and more affordable financing for MSMEs. Together, these measures position TReDS as a core national mechanism for unlocking MSME liquidity rather than a niche alternative.

However, adoption challenges still remain. Many MSMEs, particularly in smaller towns, lack awareness or digital familiarity with TReDS platforms, making onboarding difficult. Buyer participation can also lag, as financing begins only after invoice acceptance, and delays at this stage slow down payments. Moreover, some businesses register but fail to actively use the platform. MSMEs that invest in basic training, work with informed accountants, engage buyers proactively, and treat TReDS as a regular financial strategy can fully unlock its benefits and strengthen long-term cash flow stability.

Conclusion:

In today’s fast-evolving financial ecosystem, TReDS has emerged as a vital tool for MSMEs to tackle longstanding working capital challenges. By enabling the conversion of unpaid invoices into quick cash, it bridges the gap between delivery and payment, helping businesses avoid cash crunches, reduce dependency on high-cost credit, and maintain operational momentum. TReDS not only accelerates liquidity but also brings transparency, competitive pricing, and a formal financing route that many traditional SME lenders can’t match.

While adoption still faces hurdles such as digital readiness and consistent buyer participation, recent policy pushes including mandatory onboarding for larger buyers and integration with government procurement platforms are strengthening the ecosystem and boosting liquidity for small suppliers. For MSME owners, embracing TReDS isn’t just about solving a short-term cash flow issue it’s about building financial resilience, strengthening buyer relationships, and positioning your business for sustainable growth in an increasingly competitive market.