Invoice Discounting

Auxledger
Auxesis Group
Published in
3 min readOct 5, 2018

Invoice discounting is the practice of using a company’s unpaid accounts receivable as collateral for a loan, which is issued by a finance company.

Invoice discounting, in many regions is known to be a form of factoring involving ‘assignment of receivable’.

Co-founder of Auxledger, Sunny Kumar says, “Though convenient, manipulating accounts receivable is very much a possibility. According to reports, roughly 0.05%(point zero five) to 0.1%(point one) of invoices generated and paid are duplicate and on an average costs a medium sized firm with a turn over of $100Million over three years, a handsome sum of $0.3Million.

Another problem associated with Invoice Discounting is the hectic and tedious work load involved in checking the legitimacy of each invoice which if mishandled can cost a finance firm, millions of dollars. Trying to avoid this human error, finance companies consider only large invoices from well-established companies as collateral neglecting the small to medium sized enterprises.”

A well put accurate concise note on the risks involved in Invoice Discounting by the Auxledger cofounder who envisions to take blockchain in mainstream enterprise adoption. The typical risks involved in finance discounting includes :

- Counterparty credit risks involving risk-insured debtors. The short standing duration of accounts receivable ideally should make invoice discounting a low risk instrument but due to the complexities and counterparty frauds, invoice discounting becomes high-risk instrument. The ‘trust’ factor involved, also makes it difficult for startups or SMEs to secure capital against receivables in this form of financing.

- Fraudulent Receipts & Corruption involved : As the saying goes, ‘Every person has a price tag’ and its just little efforts to manipulate a person in the hierarchical lineage & cook the books.

- Contractual disputes and operation risks.

- Technology risks caused by centralized system failures, data leaks, software hacks among others. The ICT risks involved due to extensive data exchange further complicated the system.

Moreover, due to better alternative finance schemes standing in the financial markets, Invoice discounting is losing steam.

So now, the question remains — How can Blockchain save this sinking ship?

Blockchain is a digitized distributed decentralized database of all the ledgers approved by a consensus mechanism to maintain a trustfree integrated system.
Incorporating Blockchain in Invoice Discounting or Invoice Financing, will add features such as immutability and audibility in the system reducing the chances of fraudulent practices to negligible.

Blockchain ledgers are stored in several distributed processing or validating nodes used for consensus approval by network participants. The key to access the data lies with the concerned party or parties whereas others validate the transaction for its authenticity. This makes the entire platform fraud-proof and incorruptible.

Furthermore, the credit history of finance seekers will be stored in the blockchain network enthralling trust in the community. Also, the tedious approval process involved is hence cut short enabling services to the SME’s which in turn will boost the overall economy of the nation. The nascent blockchain technology yet lacks certain infrastructure elements which Auxledger aims to overcome.

Auxledger enables organizations to build their fully customized network as per their business needs & compliance requirements. Current blockchain solutions do not allow Interoperability between different Financial Institutions. The architecture of Auxledger blockchain allows interchange transactions following which banks can interconnect and avoid any fraud, further strengthening the integrity of finance seekers and investors.

Also, the Transaction speed of existing blockchain like ethereum is very slow; moreover, the cost depends on the market dynamics. Whereas,The self-regulating economic model of Auxledger proposes simple gas philosophy solving the glitches observed in Ethereum.

Wrapping up, I’d like to say, Blockchain holds breathtaking potential and with time we will witness the disruption this technology is set to bring.

--

--

Auxledger
Auxesis Group

Enterprise Blockchain Infrastructure for Decentralized Internet.