As technology started evolving, the uses of it expanded too. From the usage of technology in household appliances to the integration of it in businesses and management of financial matters became a norm since the previous decade. The changes in the business models are coming around the world, because of the implementation of various new forms of technology in the systems.
The blockchain technology is also one such technology that has just lately evolved but seems to be taking the world by storm. The major areas where the blockchain implementation has been materialized are Supply Chain, Transportation, Banking, Healthcare and Insurance, however, the most important use that the blockchain has is in the field of finance. The fintech is one area where the blockchain can be used at its maximum potential, therefore, the use of this technology in invoice financing is going to transform its function and induce a system that is fraud-free.
What is Invoice Financing
Invoice financing is a method that businesses use for borrowing money against the amount of payment that is due from the customers. This method is very useful in the maintenance of the cash flow, timely payments to employees and suppliers and for a further investment in operations and expansions. Invoice financing increases the chances of a company’s growth without waiting for them to grow after the payment from a client is made, it keeps the process of investment and profit generation keep going without breaking a momentum. Businesses pay lenders a fixed percentage in the form of the fee for the borrowed money. This really helps businesses avoid issues and difficulties that they face when a delay in payments from the customers, this method enables them easily opt for other types of business credit.
In short, it’s a type of temporary lending that fills the deficit which comes from the delay in payments to the businesses from customers. Now the blockchain implementation in fintech is revolutionizing the way, the lending and borrowing in invoice financing were taking place. It can be super-beneficial for both the lending and the borrowing companies, in order to maintain all the records of transactions without losing any detail of the orders.
How blockchain can impact Invoice Financing
Some users have already developed designs for blockchain applications that are giving an end-to-end method of giving and receiving invoices, that guarantee the authenticity, details on an invoice and the amount, payment and receipt of payment, with the discount features for the receivable on the distributed ledger.
Establishment of trust and certainty
The core purpose of establishing a system like a blockchain was to bring trust between the contracting parties. The clever use of cryptography was primarily aimed to ensure consensus from all the members of the distributed ledger, about the processing of a transaction. If a consensus is developed, there is no chance that the order of transaction can be edited or altered, the members have the right to stamp a transaction and keep it on the distributed ledger so the order remains immutable and no tampering can take place. This kind of system gives the users a great assurance that their transactions and details are safe, secure and intact in a place. According to Don Tapscott and Alex Tapscott, the platform of blockchain for the first time is going to ensure trust in transactions and the recorded information, regardless of how the other party acts or behaves.
Therefore, if discounters could be given this level of assurance and confidence, the immutability in the invoices of a company, they would definitely be more than happy. The benefits that a discounter can enjoy because of blockchain are as follow
- A ledger of stamped record that keeps data of all the invoices entered by a company is sure a positive move for the discounter to benefit from.
- A time-stamped record of the debtor’s receipt, confirmation and verification of the invoice keep the immutability high (The discounter funds against it).
- If it has been decided, an immutable time-stamped record of the entire deal and transaction is issued to the discounter as well.
- Hence, it becomes obvious that the benefits which come with blockchain have significant process enhancements. It saves time, cost along with legal and risk advantages.
Process enhancement includes:
Elimination of on-site audits of receivables and debtors alongside the general verification of the process.
The process includes the streamlining of the borrowing base certificates, receivable notification processes and month end reconciliation availability process also known as the purchase price calculations, the blockchain is going to be the best source in such circumstances where the information can be made readily available, searchable and extractable.
Legal and risk advantages
The verification from a debtor that the issued invoice is valid and authentic and that the services have been received sharply reduces the chances of a clash and the issue of non-payment of the invoice. This can also work as an incentive for the debtor as this acknowledges and confirms the invoice without any delay and keep a track record on it own. This instance of confirmation of invoices makes them visible on the blockchain to its suppliers and can easily confirm the payment terms and prices that have been offered. This is where the possibility of fraud for the discounter is eliminated from the process and the verification of the debtor takes place.
If the assignment of time-stamping an invoice is given to the discounter, he can prevent the double issuance of an invoice. The action of double issuance which is synonymous with fraud can be avoided through blockchain as all the data that carries the record of the assignment is stored on it. The process and technology have a legal standing too as the companies that issue or present the same invoice to multiple lenders can be anytime served with a notice of forgery without a warrant.
Accessibility and Searchability
The information on the blockchain remains intact and is always searchable, readable and analyzable if the parties to the ledger have given consent for it. The third party will have to seek permission from the parties and view all the details of the transactions, payment and performance of any company.
The suppliers, the blockchain would give evidence of a full and clear record of their finished transactions and the rate of success on the blockchain.
The debtors also have a complete record of the transaction saved on the blockchain on which the credit limit and debtor limit is based.
The payment of the invoice can be easily made through smart contracts. The smart contracts are automated contracts that are self-executed when the terms and conditions defined in the contract are fulfilled. In invoice financing, when a lender lends the money, the borrower and lender can both agree to set the terms and conditions with mutual consent and automate the contract based on those terms. As soon as the terms at a fixed date are met the contract gets executed and the borrower gives a share of the profit to the lender.
The invoice financing industry can be seen significantly benefiting from the blockchain technology. The streamlining process and the enhanced customer experience are areas that have remained to be most benefitted from this technology. The issue of record maintenance and fraud can be solved with the implementation of blockchain technology in the Invoice Financing.