If you are dealing with PSUs, you would already be aware of this drill. So, the order is placed, the goods are delivered, and the invoice is sent, but the payment takes weeks or even months to come through. In between, salaries have to be paid, raw materials have to be bought, etc.
Now, how do you bridge this gap? Should you go with conventional factoring, reverse factoring with the buyer’s credit, or India’s Trade Receivables Discounting System (TReDS) facility, which is specifically created for MSMEs? But, most importantly, which one is best suited if your buyer is a PSU with its own approval and payment cycles?
To help you understand these differences, let’s discuss how each of these models works, so you can benefit from them.
What Is TReDS and How It Helps MSME and PSU Suppliers
Trade Receivables Discounting System, or TReDS, is a RBI-regulated digital platform that enables MSMEs to convert their unpaid invoices into immediate cash. Rather than waiting weeks or even months for the buyer, like a PSU, to release the payment, the supplier can now use the TReDS platform, upload the invoice, and receive immediate payment from banks/NBFCs that are willing to finance the invoice.
In recent years, TReDS has gained significant traction in India’s MSME financing ecosystem. By FY2025, invoices worth over ₹1.8–1.9 lakh crore have been cumulatively discounted across TReDS platforms, reflecting rapid growth in both the number and value of transactions since FY2020. This surge highlights how digital invoice financing is becoming an important liquidity tool for MSMEs that depend on large buyers.
The process is designed to be straightforward and transparent:
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Invoice upload: The MSME supplier uploads the invoice raised on the buyer (such as a PSU) onto the TReDS platform.
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Buyer acceptance: The buyer verifies and accepts the invoice digitally.
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Financiers bid: Banks and NBFCs on the platform compete to discount the invoice.
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Funds transferred: Once the supplier selects the best bid, the discounted amount is credited to their account, while the financier collects the payment from the buyer on the due date.
For suppliers dealing with PSUs—where payment cycles can stretch beyond expected timelines—TReDS offers a way to unlock working capital quickly without waiting for the actual payment date.
What Is Factoring and How Does It Work?
Factoring is a financial service where suppliers sell their invoices to a bank or NBFC at a discount to receive immediate cash. Unlike TReDS or reverse factoring, factoring is initiated by the supplier and does not require the buyer’s participation. This makes it a practical solution for PSU suppliers whose buyers are not onboarded on TReDS or other digital platforms.
The Indian factoring market has grown steadily over the years. According to IMARC Group, the market value is expected to reach ₹8,000–9,000 crore by 2025, reflecting strong demand from MSMEs and mid-sized suppliers seeking faster access to working capital.
The process generally follows these steps:
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Invoice sale: The supplier submits unpaid invoices to a factoring company.
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Advance payment: The financier pays 70–90% of the invoice value upfront, depending on the supplier’s creditworthiness and tenor.
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Fee/discounting: The financier charges a discount or fee, typically 1.5–4%, which varies based on risk and invoice duration.
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Settlement: The remaining balance (minus fees) is paid once the buyer settles the invoice.
For suppliers working with PSUs, factoring can bridge cash flow gaps even when the buyer is slow or not digitally integrated, allowing operations to continue without financial stress.
What Is Reverse Factoring and How Does It Work?
Reverse factoring is a buyer-led financing solution where a strong buyer, such as a PSU, initiates the program. Suppliers submit invoices, the buyer approves them, and financiers advance funds at a discount based on the buyer’s creditworthiness.
Because the cost is tied to the buyer’s profile, it’s usually cheaper than traditional factoring, making it ideal for MSME suppliers working with large PSUs.
How reverse factoring works:
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Buyer initiates program: The PSU or corporate sets up a financing program with a bank or NBFC.
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Invoice approval: Supplier submits the invoice, which the buyer approves digitally.
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Financier pays supplier: The financier advances payment at a discounted rate, using the buyer’s credit as the basis for pricing.
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Buyer settles financier: On the invoice due date, the buyer pays the financier directly.
For PSU suppliers, reverse factoring can significantly reduce financing costs while accelerating cash flow, particularly when the buyer has a strong balance sheet and is actively supporting vendor payments.
TReDS vs Factoring vs Reverse Factoring: Key Differences
When it comes to unlocking working capital, not all financing options are created equal. Suppliers dealing with PSUs often struggle with long payment cycles, and choosing the right solution can mean the difference between smooth operations and cash crunches.
While TReDS, factoring, and reverse factoring all help suppliers access funds faster, they differ in who initiates the financing, cost, speed, and suitability. Understanding these distinctions is key to picking the right tool for your business.
Key takeaway:
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TReDS is ideal for MSMEs dealing with PSUs already onboarded.
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Factoring works when the buyer isn’t on TReDS or speed is needed without waiting for approvals.
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