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Why Invoice Discounting on TReDS Beats Traditional Bank & NBFC Loans?

In today’s dynamic business landscape, especially for small and medium enterprises (SMEs), access to working capital can be a game changer. While banks and NBFCs (Non-Bank Financial Companies) have long been the go-to sources of finance, emerging platforms like TReDS (Trade Receivables Discounting System) are redefining what it means to get timely, efficient, and cost-effective funding. Let’s explore why invoice discounting via TReDS is often a better option than traditional bank or NBFC loans.

What is Invoice Discounting on TReDS?

Before comparing, it helps to understand what invoice discounting on TReDS means.

Invoice Discounting refers to the process where a business holding receivables (that is, invoices owed by its buyers) can get cash immediately by selling or discounting those receivables to a financier, instead of waiting for the buyer to pay.
TReDS is an electronic platform mandated in India (by the RBI) which enables sellers, buyers, and financiers to transact in trade receivables in a regulated, transparent, and efficient manner. It helps sellers get early payment on invoices, and financiers get exposure to low‐risk receivables from creditworthy buyers.

Key Advantages of TReDS Invoice Discounting vs. Traditional Loans

Here are several reasons why invoice discounting on TReDS often outperforms bank or NBFC loans for SMEs and growing businesses.

1. Faster Access to Funds

With bank loans or NBFC credit, there are multiple layers of paperwork: credit approvals, collateral checks, history of financials, and often long waiting periods. TReDS, however, works on actual invoices that are already validated with buyers. Since invoices are usually backed by established buyers or corporate entities, the financier has confidence in the cash flow. This reduces the time for verification, credit checks, and approvals. As a result, funds are released much sooner.

2. Lower Interest Cost / Better Pricing

Banks and NBFCs often set interest rates high for SMEs because of perceived higher risk, lack of collateral, or weaker credit histories. In contrast, when invoices are discounted through TReDS, the risk is lower (since the invoice is from a creditworthy buyer). Also, due to competitive bidding among financiers on the TReDS platform, the discounting rate (which is analogous to the interest cost) can be significantly lower. This competitive environment helps bring down the cost of capital for the seller.

3. Collateral & Guarantee Requirements are Minimal or None

In many bank or NBFC loans, you have to provide collateral, guarantees, or personal security. Sometimes companies pledge fixed assets or real estate or even personal guarantees of promoters. With invoice discounting on TReDS, collateral is the invoice itself. As long as the debtor (buyer) is credible and accepts the invoice, the financier takes its risk mainly from payment performance rather than the borrower’s physical assets or promoter’s net worth. This is a huge relief for SMEs who may not have strong collateral.

4. Risks Shifted to Creditworthy Buyers, Not the Seller

Because invoices in TReDS are tied to real buyers, often large corporates or well established firms, financiers look at buyer creditworthiness rather than the seller’s. So if a business sells an invoice owed by a reputable buyer, the seller’s risk is lower. Traditional loans, by contrast, tend to assess the risk of the borrower heavily, meaning weaker or smaller companies get penalized with high rates or tighter terms.

5. Transparency and Regulation

TReDS is regulated by RBI, with defined rules, oversight, and standard procedures. All participants (seller, buyer, financier) operate under a transparent schedule; there are standard contracts, set timelines for dispute resolution, and enforceable rights. Banks & NBFC loans, though regulated, sometimes have less standardized terms for invoicing, collateral, documentation, or disputes, which can lead to delays or hidden costs.

6. Better Cash Flow Management

Invoice discounting lets businesses convert receivables to cash earlier, which improves liquidity. With healthier cash flow, firms can meet payroll, purchase raw materials, invest, and expand more sustainably. Loans, especially working capital loans, may have repayment obligations or interest burdens that reduce flexibility. Also, the pressures of fixed interest payments might hurt more when sales are cyclical. Invoice discounting aligns better with receivable cycles.

7. Reduced Debt Burden

Using invoice discounting doesn’t add new debt to the balance sheet in the same way as a loan might (depending on accounting norms), or at least it leverages existing receivables, not additional liabilities. This can make financial ratios look healthier and may avoid some of the over-leveraging that loans can produce. It also helps with maintaining better credit ratings, since outstanding invoices being discounted might be seen more favorably than variable high-interest loans.

8. Competitive Bidding Drives Better Terms

As mentioned before, on TReDS, multiple financiers can bid to buy/discount a given invoice. This competitive auction-like environment means you may get more favorable discount rates, fewer fees, or better advance percentages (i.e. what the financier gives you upfront), compared to banks/NBFCs which may negotiate unilaterally.

Potential Weaknesses & When Bank/NBFC Loans Might Still Be Needed

It’s fair to say that invoice discounting via TReDS isn’t a panacea. There are cases where bank or NBFC loans might still make sense, or where they complement each other:

Large, long-term capital needs like buying fixed assets, real estate, or long gestation projects still often require classic term loans.
When the buyer’s credit rating or acceptance is weak, the invoice may be rejected or priced very high; banks/NBFCs might still have more flexibility (though likely at a cost).
When volumes of invoices are small or irregular, transaction costs, platform fees, or minimum thresholds may make invoice discounting less efficient.
When a business needs certainty over longer tenors: bank/NBFC term loans may offer longer repayment periods than the shorter time frames of receivables.
Relationships and bundling: existing relationships with banks might lead to favourable overdraft, cash credit or line of credit arrangements that are hard to beat if the bank is a preferred partner.

Comparison Table: TReDS Invoice Discounting vs Bank/NBFC Loans

Real-World Impact for SMEs

Imagine a small manufacturing firm, “ABC Components”, supplying to large auto OEMs. They generate many invoices but are paid after 60 or 90 days. Traditionally, to maintain working capital, they may approach an NBFC for a loan, pledging assets or personal guarantees, paying high interest, and waiting weeks for funds. Meanwhile, their suppliers want payment earlier; wages need to be paid; opportunity for bulk raw-material discounts may be missed due to cash constraints.

Now, with TReDS:

ABC uploads its invoice towards large OEMs into the platform.
A financier reviews buyer’s credit‐worthiness (since the buyer is a large OEM, credit risk low).
Multiple financiers bid, giving competitive discount rates.
ABC gets immediate cash (maybe 80-90% of invoice value), minus discount fee.
When OEM pays after 60 days, the financier retains its fee, ABC gets the remainder.

The result: faster funds, lower cost than many NBFC or unsecured loans, minimal collateral, better cash flow.

Regulatory Support & Broader Ecosystem

TReDS is not just a theoretical construct; it is backed by regulatory frameworks that aim to protect all parties and build trust. The RBI supervises its operation, ensuring standards in documentation, dispute resolution, fair practices. This reduces uncertainty and risk, which are often baked into NBFC or bank loan costs for smaller firms.

Additionally, many large corporate buyers are now mandated or encouraged to allow invoices to be traded on TReDS, further increasing acceptability and liquidity.

Conclusion‍

While bank and NBFC loans have their established place especially for long-term investment, large purchases, or when a firm has strong collateral and credit history invoice discounting on TReDS offers a compelling alternative for working capital finance. For many SMEs, it translates into: