For decades, cash flow has been the backbone of small businesses across the nation, and for MSMEs that do business with government entities using the GeM website, the disparity between the time it takes to deliver an order and the time they receive a payment is often the deciding factor in whether or not they will survive. While the GeM site stipulates that a supplier must be paid within ten days from the time the CRAC (Community Resource Action Center) is generated and levies a one percent penalty for each month that passes after that until the payment is received, there are more than Rs 28,817 crores worth of outstanding invoices that can be viewed on the MSME Samadhaan portal. Nearly 40 percent of these outstanding invoices are owed to MSMEs by government agencies and public-sector undertakings (PSUs). Because of the lack of cash flow, the MSMEs may attempt to obtain expensive working capital loans, or they may choose to forfeit the opportunity for growth due to their limited capital.
Dynamic discounting and early payment strategies enable MSMEs to more effectively manage the accounts receivable from government orders. There are now many dynamic discounting and early payment strategies on the market that were originally developed as trial fintech solutions, and in 2026 they have matured to a stage in which they are widely accepted as support tools for managing cash flow. The GeM website and trade receivables discounting systems (TReDS) are examples of platforms that have capitalized on this trend; they are working in conjunction with traditional banks, and numerous fintech startups are implementing new business model strategies to provide MSMEs with the technology to convert approved invoices into cash almost immediately (typically at competitive discount rates) while eliminating the 30- to 60-day delay in payments associated with cash-only debt. M1xchange has completed more than Rs 1,45,000 crores of discounts on approximately 30 lakh invoices for over 45,000 MSMEs, demonstrating not only that millions of MSMEs have historically had access to and benefited from early payment solutions, but also that early payment solutions work.
Understanding Dynamic Discounting: Beyond Traditional Factoring
Dynamic discounting is a major shift away from conventional invoice factoring. Dynamic discounting allows MSMEs greater flexibility and control over their working capital management than traditional invoice factoring (invoices are discounted based on the time the invoice is 'paid for'). The biggest difference between the two options is that, in the past, sellers would offer fixed discounts for paying early (for instance, the option of a 2% discount for paying an invoice 10 days early, with full payment due in 30 days). Dynamic discounting instead allows for sliding scale discounts based on how soon a buyer pays for an invoice.
Dynamic discounting takes place on a digital platform (the early payment digital invoice) with the buyer's approved invoice(s) displayed in the early payment section. MSMEs can choose from these invoices they need to have funded sooner. Once an invoice has been identified as requiring immediate funding, the MSME will indicate what discount rate they are willing to accept (as expressed in APR as %) for that invoice. The buyer can choose to accept that offer any time prior to the due date of the invoice. Once the buyer chooses to accept the offer, the dynamic discounting platform calculates the discount amount based on how many days before the due date the invoice was paid. The formula for calculating the amount of discount is (APR % ÷ 365) x (number of days/money spent prior to the due date) x (amount of invoice) = (amount of discount).
An MSME supplier's invoice for Rs 20,000 has payment terms of 90 days. However, he uses a dynamic discounting platform to offer his buyer a discount of 12% per year if he pays the invoice 60 days early. The buyer's discount calculation is as follows: (12% ÷ 365) × 60 × Rs 20,000 = Rs 394. Instead of receiving Rs 20,000 at the end of 90 days, the supplier receives Rs 19,606 immediately. This makes sense for many MSME suppliers who have limited cash reserves.
The key advantage of dynamic discounting for MSMEs vs. traditional invoice factoring is that the supplier controls how much of a discount is given to which invoices at what point of time and what type of discount is applied based on his current cash-flow needs. In times of urgent need for raw materials, the supplier may offer to discount invoices more heavily because there is an immediate need. In times of stable cash flow, the supplier may not need to discount at all and can simply wait for full payment.
In addition, dynamic discounting is more affordable than the other financing options available. The majority of traditional bank loans for working capital charge between 14% and 18% interest annually. For invoice factoring, interest rates usually land between 15% and 20% each year, plus additional fees associated with each invoice processed through an invoice factoring company. On the other hand, most Dynamic Discounting interest rates for Government Invoices (which have a very low risk of default) are between 8% and 12% APR, so Dynamic Discounting represents a large Savings versus the same value of Liquidity provided by Traditional Bank Loans and Invoice Factoring.
TReDS Integration with GeM: The Institutional Framework
The Trade Receivables Discounting System, or TReDS, is an institutional framework created by the Reserve Bank of India (RBI) for MSMEs to gain access to immediate liquidity against government orders placed on the government eMarketplace (GeM). TReDS is a policy initiative designed to tackle payment delays faced by MSMEs and create an electronic marketplace that connects MSMEs, corporate and government customers with a number of financiers for the transparent and competitive discounting of invoices.
There are currently three TReDS platforms licensed by RBI that are available to MSMEs in India: M1xchange created by Mynd Solutions, RXIL created by Receivables Exchange of India, and A.TReDS created by Axis Bank. Each of these platforms offers a facility allowing the MSME to upload approved GeM invoices to TReDS for financing, making the entire process simple for the MSMEs because the invoice can be uploaded once the government has accepted the delivery of the order within the GeM's system.
The process that the TReDS platform follows for MSME suppliers of GeM is very simple, as follows: after completing the order placed on GeM and receiving a Consignee Receipt and Acceptance Certificate (CRAC) from the government buyer, the MSME simply uploads his invoice information to the TReDS platform, and the TReDS system checks the invoice's authenticity by integrating with GeM systems to verify the following: whether an order was placed, whether the ordered item(s) were delivered, and whether the payment for the ordered item(s) is due. Once these steps are complete, the invoice is made available for financing.
Typically, there are more than 20 financiers (banks and non-banking financial companies) that have registered to do business on TReDS and to cross-bid on financing an invoice. By using this auction format for bidding on an invoice, TReDS allows for reduced financing costs when compared to getting a loan from a single bank or other financial institution, as multiple financiers compete to provide the best rate, thus offering MSMEs the best deals available in the marketplace. Once an MSME chooses the most beneficial offer, the funds can be deposited into the MSME's bank account generally within 24 hours of accepting the bid. This process significantly decreases wait times for payment by the government from approximately 30-45 days to only 1 day.
Crucially, financing from TReDS does not place the burden of repayments on the MSME. This means that should the government not pay on time, the MSME will not be responsible for repaying the financier; the obligation to collect from the buyer lies with the government, and that may happen via direct automatic bank transfer (via NACH) from the buyer to the financier on the due date. This avoids collection risks for MSMEs, and thus allows for MSMEs to receive proceeds as a direct result of discounts (not as loans) that do not have to be repaid using their own funds.
Due to how effectively TReDS streamlines business operations, they are able to provide a low-cost service and still compete in the market. For MSME users, costs associated with using TReDS for financing will generally consist of a discount rate (interest rate) charged by the bank based on an MSME's invoice (typically between 8-14% APR), depending on its buyer’s creditworthiness and current market liquidity. The transaction fee charged by TReDS will be minimal, usually 0.5 - 1% of the invoice amount with no collateral requirement, no credit history, or minimum turnover thresholds. Therefore, TReDS has opened a way for MSMEs to access financing located within the formal banking sector that have traditionally not been able to do so.
GeM's 10-Day Payment Mandate and Penal Interest: The Stick Alongside the Carrot
Dynamic discounting and TReDS are the "carrots" on one hand, and GeM’s payment compliance support mechanisms apply "sticks" in the form of penalties for late-payment settlements, pushing buyers to settle on time and making the early payment finance product a more successful tool for settling accounts.
Under GFR (General Financial Rules) 2017 and GeM’s procurement rules, all government procurements completed through GeM must be settled within ten calendar days from CRAC generation under Rule 149 of the GFR. The total elapsed time for government procurement payment needs to be considerably less than the 30-45 day payment terms typically granted by commercial markets and the 45-day payment timeframe mandated by MSME suppliers.
The GeM system calculates and applies a penalty-interest charge equal to 1% on any unpaid invoice for every month of delay beyond the 10-day payment period. If an Rs 50,000 invoice remains unpaid at day 20 after the CRAC was generated (10 days past due), the buyer will owe a total of Rs 50,167, which is calculated as follows: Rs 50,000 + (10/30) × Rs 50,000 × 1%. To add to this, the implied penalty-interest charge will continue to increase as the number of days of delay increases.
The penalty component of the interest mechanism has many useful purposes besides compensating suppliers. It provides incentive structures for institutional accountability. The delay in payment systems is made visible and quantifiable through the automated tracking system used within GeM. Since the department's budget is responsible for the costs associated with delays, timely payment becomes a financial obligation for the procurement officer.
This enhanced visibility allows the government and ministry heads to monitor payment compliance and discipline across their departments and ministries. For Micro, Small, and Medium Enterprises (MSME), the theoretical timeframe of receiving payment within 10 days of submission represents a marked improvement in comparison to past experiences with government purchasing, in which 90-day to 120-day delays were common. However, experience has produced considerable discrepancies between the policy and its execution.
Central Government Buyers using PFMS have a relatively high level of adherence to the anticipated payment cycles, ranging from 10 to 15 days, due to the enforcement of discipline through the brand's automated systems. On the other hand, many state government buyers or autonomous bodies, who do not rely entirely on PFMS for support, experienced delays of between 30 and 60 days despite the implementation of GeM mandates, mainly due to delays in approvals of their own budgeting processes leading to bottlenecks.
The existence of an implementation gap has been highlighted clearly by the utility of both TReDS and dynamic discounting to MSMEs despite the introduction of a payment obligation of 10 days. For example, if an MSME has fulfilled a Rs.5 Lakh order, they may receive payment after 45 days—i.e., they have received all of their payments earlier than what is required by law (10 days)—but they can take advantage of the system and receive 90% of the invoice value (i.e., Rs.4.50 Lakh) instantly via TReDS at a 12% Annual Percentage Rate (APR), discounted over a 35-day period; i.e., the discount amount would be Rs.5,100. For this price the MSME is able to access available working capital to fulfill additional orders without having to wait on their prior order to be paid.
Practical Implementation: How MSMEs Access Early Payment
For MSME suppliers to the government e-marketplace, there are specific platforms and processes for accessing early payment mechanisms. Once you understand the practical steps involved, it will improve your ability to secure early payment against the approved invoice as working capital whenever you have a requirement for cash flow.
Do this by registering on at least one of the TReDS platforms (M1xchange, RXIL, or A.TReDS). To register as an MSME supplier, you must provide a few key MSME documents, such as the Udyam certificate, GST certificate, PAN, bank account number, and authorization of signatory. The duration of the registration process is generally 3 - 5 days from the date of submission of the registration application, and in the majority of cases there is no charge for registering on a TReDS platform. Accordingly, many MSMEs will also choose to register on two or more TReDS platforms to take full advantage of the various financing options available and to increase the level of competition between financiers.
Also, after your GeM orders have been fulfilled, and you have received a CRAC from your buyer. Log into your TReDS account and enter the invoice details. Because TReDS platforms are integrated with GeM, verification of invoice reliability is performed automatically by the TReDS platform. The TReDS system automatically verifies all of the necessary elements of an invoice's reliability; specifically, that the relevant order exists in the GeM records, that the delivery was made, and that the payment is legitimately owed as evidenced by the CRAC. In this way, you are able to complete the invoice verification process in hours rather than the days or weeks that it would have taken a traditional lender to complete the manual verification process.
Once your invoice has been verified on the platform, it will be visible to the financiers that have registered to use the system. At this point, you can choose to accept any automatic bids that an investor makes on your invoice at any time or use your defined discount rate as a benchmark when deciding to accept a funding offer. The nature of government invoices creates a very low level of default risk, leading to many competitors submitting bids for your unpaid invoices, ultimately allowing you to select the terms that best suit your needs. Once a funding offer has been accepted, the funds will be electronically transferred into your registered bank account within 24 hours, which is a dramatic change compared to the 30-60 days you would typically wait for a payment to complete through traditional means.
Another option for obtaining invoice financing through GeM is through a direct bank partnership. Several private and public banks in India have created products specifically for suppliers on GeM (Govt of India e-Marketplace). These banks have created products based on the purchase orders received or the CRAC issued by GeM as collateral for loans to be used as working capital for the suppliers. Products offered through banks for GeM suppliers include overdraft facilities and term loans. Most bank products are based on payment certainty provided by the government.
Fintech companies such as CashFlo, Credlix, and others have created technology-based invoice discounting platforms that are designed specifically for MSMEs (micro, small, and medium enterprises) and GeM suppliers (micro, small, and medium enterprises and government suppliers). The platforms allow users to access their services through WhatsApp, and they support the 10+ Indian languages. As a result, the technology-based platforms provide access for non-English language entrepreneurs who may otherwise be unable to obtain financing. The rate discovery capabilities offered by these fintech companies using AI drive an enhanced accuracy of discount calculations and may provide an improved discount rate versus reaching a discount rate through manual negotiation.
Strategic Considerations: When to Use Early Payment
While MSMEs will benefit from utilizing the early payment mechanism as one of their liquidity tools, they should strategically utilize it, not automatically discount every invoice as soon as it is received. Understanding the importance of determining the optimal time to take advantage of early payment versus when to wait on receiving the full payment determines which businesses are financially savvy and which are throwing margins away unnecessarily.
Use early payment when there is an immediate cash need that is higher than the costs of obtaining the discount. For example, if you have an opportunity to purchase raw materials immediately at a price 20% below normal pricing as a result of a supplier clearance sale, you can generate a greater net return by utilizing a discount of 2-3% on invoices to fund the purchase of the raw materials. In addition, if you have equipment that breaks down and may prevent you from fulfilling an order, you can use early payment to access financing to pay for the repair before waiting for collection from the customer.
In stable cash positions, do NOT discount all invoices on an ongoing basis. For example, if your company is able to accept payments via PFMS without disruption to operations for a period of 10-15 days, or 30 days for other customers, it is in your best interest to keep the entire value of the invoice rather than automatically discounting the invoice on all invoices moving forward. Furthermore, during periods of stable cash flow, the funds generated should be set aside to build cash reserves to reduce the need to use expensive financing during times of tight cash flow.
Evaluate the discount rate against the cost of borrowing through other sources of funding. For example, if you have access to bank overdrafts charged at 12%, then you wouldn't use invoice discounting, which has a 14% APR, unless you obtain a substantial operational advantage due to how quickly you are able to receive your payment(s). On the other hand, if your only choice is through a personal loan at 18% or a credit card advance at 24%, then invoice discounting at 10-12% would be an obvious cost savings for your business.
Consider buyers with varying payment times, as government departments (central) set up PFMS for reliable receipt of payments due within a 10- to 15-day period; therefore, early payment is less valuable unless an emergency exists. By contrast, state-owned Public Sector Units (PSUs) and Autonomous Bodies frequently will take 45 to 60 days to pay (even with mandates to the contrary); therefore, in this particular case, early payment options are much more attractive for payment due on invoices from buyers for whom you can predict a delay.
Utilize invoice financing as a growth strategy. If the ability to discount your receivables will allow you to accept larger orders, plus the ability to hire additional capacity and develop more products (that return a greater return on investment than the discount cost), then you can turn early payment into an acceleration of growth and not just a cash flow patch. You should determine the ROI (return on investment) of any growth opportunities you would gain through additional working capital against the cost of procuring that capital via invoice discounting.
The Future: AI-Driven Dynamic Discounting and Blockchain Integration
As we look forward to 2026 and beyond, the advancement of payment systems to MSMEs via GeM (Government e-Marketplace) will increasingly take advantage of emerging technology, enabling MSMEs access to cheaper and more transparent and less cumbersome processes.
Artificial intelligence technology is already revolutionizing how dynamic discounting is carried out by aiding the determination of rates intelligently. Rather than MSMEs guessing at the discount rate they should offer or accepting a financial institution's bid, AI algorithms review your historical cash receipts and payment patterns, your seasonal working capital requirements, and the liquidity in the market today to recommend the most advantageous discount rate for maximum net proceeds, while ensuring your access to finance is not in jeopardy. For example, the CashFlo platform utilizes machine learning to find the ideal point at which funds will be provided quickly to the MSME at the lowest cost that will sustain itself.
Blockchain is likely to provide an even more efficient way to validate invoices and reduce friction in the financing process. To date, all current TReDS (Trade Receivables Discounting System) systems still contain some manual verification steps and coordination issues between various platforms. By using blockchain-based invoice registries that contain GeM orders, CRACs (Central Receivables Approvals Certificates), and payment statuses on an immutable distributed ledger, any financier could quickly and easily verify invoices, thus removing verification lag time and lowering operational costs that are ultimately passed on to MSMEs as costs of using the platform.
The use of smart contracts can eliminate the need for human intervention in the invoice discounting process. When CRAC (Commercial Receivable Account Collection) is generated on GeM and stored in blockchain, it can be added to the list of smart contracts and will trigger pre-approved financing offers from financier groups automatically. E.g., once a CRAC is generated, the financier will accept the offer and make the funds available within minutes instead of hours. This type of automation will increase the availability of working capital and reduce costs through greater operational efficiency compared to current methods.
The addition of alternative data for the purpose of credit scoring will increase access to financing for MSMEs beyond the normal limits of the MSME sector. For example, an Artificial Intelligence (AI) system that analyzes GeM data—specifically the tracking of on-time deliveries, customer satisfaction ratings, and orders received over time—would be able to evaluate the creditworthiness of an MSME without having to take into account any historical financial data or a traditional credit report. With this type of credit scoring system, new MSMEs that do not have access to many years of audited financial statements can qualify for favorable invoice financing terms by demonstrating good operational performance.
The Bottom Line: Cash Flow Transformation for the MSME Ecosystem
Dynamic discounting and the integration of TReDS and early payment mechanisms do not merely represent financial products. They fundamentally change MSMEs' ability to participate in government procurement and create scalable government businesses. Through direct access to immediate working capital at a competitive rate through converting GeM-approved invoices into working capital, MSMEs now have the opportunity to close the cash flow gap that has always kept the capable small business from being able to capitalize on the government procurement marketplace.
As of 2022, GeM transactions exceed Rs 13.60 lakh crore, and there are over 10 lakh registered MSMEs as sellers. Therefore, the number of potential buyers of invoice finance products is very large, and therefore, it is an expanding market for invoice finance products. TReDS Platforms are currently trading finance in excess of Rs 1,45,000 crore on millions of invoices, therefore demonstrating the market's proven demand and successful model validation. As TReDS platforms continue to be enhanced with increased technology access and TReDS financial providers become more competitive with their cost of funds/infrastructure, access to providers will continue to grow while the costs of provision will be driven down due to competitively efficient providers.
The strategic imperative for MSMEs is clear: i.e., register on TReDS platforms, find out what early payment options exist, use them wisely, and build up working capital reserves during economic stability so they can rely less on external sources of financing in times of growth. While early payment mechanisms can provide significant assistance to MSMEs, they require proper use and not blind use.
With GeM's 10-day payment requirement and penalties for non-payment combined with the growing use of TReDS by MSMEs, as well as a growing number of lenders working with GeM to finance their customers, there now exists a system in which MSMEs can take larger orders and continue to expand their operations and aggressively pursue growth without sacrificing cash flow stability by using early payment solutions strategically. The previously insurmountable cash flow problems associated with MSMEs are being broken down, thanks to the availability of inexpensive ways to fund working capital, a proven framework to facilitate the flow of funds, and the continued evolution of fintech solutions powered by artificial intelligence.
Therefore, an MSME will need to utilize the above programs as a mechanism for the transformation of working capital constraints from a growth-limiting barrier to a manageable obstacle with the help of modern financial innovations.
