Many SMEs are dealing with cash flow issues because the traditional financing industry is not meeting their needs. Businesses that need cash flow to pay for materials, start the production process, pay employees, or cover any other business expenses, often turn to alternative forms of financing to obtain funds and ease their cash flow issues.
Invoice financing, or factoring, is one way. This form of financing involves factoring companies, or lenders, purchasing a company’s owed accounts receivable and collecting payments on those invoices. After payments are received in full, the factoring company takes a cut for their services and sends the differences back to the business.
This method of financing can be a practical option for businesses that have outstanding accounts receivable within the 60 to the 90-day range and need to release capital to operate their businesses. Blockchain has the potential to alleviate cash flow pain points in a number of ways using invoices, which are one of the most valuable assets an SME possesses. Invoices can serve as collateral to unlock cash flow and support business growth. This type of financial transaction represents an acknowledged, legally enforceable obligation between two legal entities and behaves in the same manner as a legally binding contract.
Manually assessing the risk of an invoice may involved a number of intermediaries. Factoring stands to be much more favorable for the factoring companies as well as their clients if the verification and payment functions can be decentralized using blockchain technology.
On a decentralized platform, both suppliers and buyers have access to necessary transactional information in real-time. From the initial order to final payment, every transaction takes place on a shared network. This transparency enables suppliers and buyers to reduce the need for human validation and approval of transactions, resulting in faster transaction processing improved cash flows for suppliers, and potentially better rates from invoice finance providers. Every step of the supply chain process is time-stamped and verified by all parties, meaning that information is accurate and immutable. This added level of visibility may also mean that businesses will have more invoice financing solutions available, too.
Blockchain and the principles of smart contracts can enable the transformation of invoices into smart transactions, allowing third-parties to participate in the purchase of these contracts and anticipate cash flow. Furthermore, smart contracts can represent an invoice, or any similar financial document, and be used as collateral to support a loan.
