Invoice Factoring on the Blockchain
Invoice factoring is a great way for companies to free capital locked up in accounts receivable. By selling invoices to an invoice financing company (known as a factor), a company can immediately claim the majority of the outstanding invoiced amount (roughly 80–85%) and then receive the rest, minus a percentage of the total amount and fees charged by the factoring company, once the invoice is paid by the customer. The factor will usually keep a percentage of the invoiced amount which will vary based on the length of the invoice payment terms (30, 60 or 90 days) with the amount kept by the factor increasing with the age of the invoice. An invoice paid within 30 days will incur a smaller percentage than an invoice paid within 90 days. It’s also good to note that the invoice factoring market is valued at almost $3 Trillion USD and used by from small and medium-sized enterprises to fortune 500 enterprises.
An Example
Let’s say you are a company who has invoiced a customer $10,000. After engaging a factoring company, who will vet both your organization and the customers you are invoicing, the factor will advance you 80% of the invoiced amount or $8,000. If the factor charges a 5% per month and your customer pays within 30 days, you will receive $1,500 and the remainder ($500) will be kept by the factor.
Caveats
Invoice factoring can be an attractive option for companies; it addresses cash flow issues, especially when dealing with longer payment terms. Unlike loans and other methods of borrowing, the factor may take on the risk of non-payment or late payment although there are costs associated with this reduction in risk. Additionally, factoring companies may pass on other fees such as credit checks or debt collections, which will eat into expected revenues.
Because invoice factoring bears risk, factors will want to ensure the majority of payments are paid within the terms of the invoice. This means qualifying for factoring which means credit checks, both of you and your customers.
You will also need evaluate whether the factor engages in recourse factoring where a factor will seek reimbursement from you for an invoice that a customer fails to pay. Some factors offer non-recourse factoring, but you will need to check the fine print; there may be exclusions or higher fees for these kinds of factoring services.
Supply Chain Factoring
Business-to-business (B2B) and business-to-government (B2G) procurement is often associated with long payment terms; some larger customers may take up to 90 days to pay. This has serious implications for a vendor’s cash flow, especially for smaller companies who are often operating on a shoe-string budget and may only be able to pipeline a single project at one time due to resource and funding constraints. This leaves the supplier cash poor until the invoice is paid, which ultimately limits their ability to innovate and grow.
Factoring quickly liquidates capital tied up in monies already owed to the company, so they can continue to operate without budgetary constraints or fiscal frugality.
Factoring on the Blockchain
Current factoring is very hands on and requires a lot of manual intervention. It also requires collating various information to verify risk versus reward. Factoring terms often vary and may include hidden caveats and gotchas not immediately apparent but ultimately very costly.
Decentralizing the factoring process and moving it to a public ledger seems like a logical step. Using smart contracts to capture factoring agreements, companies can quickly evaluate the requirements of the factoring process and agreements between the company and the factor can be automatically implemented.
The blockchain is also perfect for building trust between companies, customers and factors. Past and current performance can be instantly accessed and factoring applications can be processed in realtime using automated tools. No more waiting days before knowing whether you meet a factor’s criteria; instead you will have immediate feedback as to whether you qualify for invoice factoring.
The Planport Factoring Marketplace
Planport’s factoring smart contracts will provide immediate, automated factoring. Companies will be able to quickly select invoices to liquidate and will be able to sell their invoices on a decentralized market. Factors will be able to instantly audit a company’s performance (as well as its customers), cutting down on costly manual processes. This will reduce costs associated with factor management and auditing, resulting in a more competitive market and a cheaper solution for all market players.
An entire spot factoring marketplace will be available for the instant sale of outstanding invoices. Companies can even connect their entire accounts receivable to the factoring market and reconcile accounts as soon as the invoices is issued.
Even though multiple currencies can be supported, the PORT token will play a major role in this instant liquidity market. Factors could stake PORT on the system, specifying the exact amount they are willing to inject into the factoring marketplace, specifying the qualifications that would govern whether an invoice is factored or not, and setting the fees that would be associated with each factor. Fees could even be fluid, dependent on the financial position of the company and its customers.
The Future of Invoice Factoring
We see a major change in the way invoice factoring will be conducted on the blockchain. Factoring will be more accessible to companies looking for quick capital from work they have carried out. Factors will be able to easily audit their customers and instantly purchase invoices.
If you’re interested in knowing more about invoice factoring there are some great resources available.
FitSmallBusiness.com provides a great overview of invoice refactoring. Check out https://fitsmallbusiness.com/how-invoice-factoring-works/.
Wikipedia is also a good place to start, with a comprehensive explanation of the invoice factoring process; https://en.wikipedia.org/wiki/Factoring_(finance).