Blockchain-based marketplace for Invoice Finance
Blockchains and Byzantine Fault Tolerance systems form the basis of decentralized currencies and ledgers such as Bitcoin, Ethereum, Monero, and others. But beyond the currency aspects (e.g. anonymity, censorship resistance and their independence from central banks, etc.) we argue that there are other interesting properties that are necessary to certain types of enterprises that could add significant value in their ecosystems. One of these products is Invoice Factoring or otherwise broadly known as Invoice Finance.
Let’s explore Invoice Finance and its implications with a Distributed Payment Transactions Networks
What is invoice finance?
Managing cash flow is essential for any business, and SMEs in particular, to deal with daily operating expenses and an invoice is the single biggest asset an SME (Small Medium Enterprise) has that can be traded for cash flow.
In other words, if you have a business that is regularly invoicing customers and has payment terms with your customers that are greater than 30 days, Invoice Finance may be right for you. Invoice Finance releases cash to your business on the same day as the invoice is issued. This is a fantastic way for you to improve your cash flow and be able to pay your employees, suppliers and manage all operational costs.
There are two main types of Invoice Finance:
Invoice Factoring:
Where the credit-control is provided by the lender. Your invoices are issued and the money is collected by the lender
Invoice Discounting:
The Lender provides the funding to you, you issue the invoices to your customers and follow up on payments directly. This is also known as the Confidential Invoice Discounting facility, as your customer would not know that you have the backing of a lender behind you.
How does it work:
Lenders usually provide funds for 60 or 90 or 120 days to help you collect your debt from your clients. The usual drawdown is approximately 80–85% of an invoice minus the Lender’s arrangement fee. If you invoice your client on the 1st June at 9am, you can log on to the Lender’s online system at 9.15am and draw down your funds immediately. These funds would be in the region of 80–85% of your invoice value minus an arrangement fee. You then have 60, 90 or 120 days to collect your outstanding dues from your clients. This allows you to meet payroll, pay suppliers and meet other cash flow requirements.
As a highly profitable investment instrument, traditional invoice finance is open only to banks and very large funders.
In theory, invoice finance (factoring) should be a straightforward process –
1. The SME provides goods or services to its customer (the debtor)
2. The SME raises an invoice for the work delivered and sends to the customer
3. The SME provides a copy of this invoice to the bank
4. The SME draws-down up to 85% of the gross value of the invoice
5. The bank chases the debtor to pay the invoice on time
6. The bank collects the payment from the debtor
7. The SME receives the balance of the invoice less interest charged
The reality, however, is often not as simple as the steps described above. The problem
definition section explores and exposes the hidden complications in the
aforementioned process, along with other challenges, used by banks and large funders.
The problems with legacy Invoice Finance providers:
There are a number of issues when it comes to Invoice Factoring. A common approach to factoring is a continual relationship between a financier and commercial enterprise which is also called Portfolio factoring in which all invoices from a seller are managed by the factor. In this case it is almost impossible for the Seller to double pledge any invoice if all invoices are managed by its Factor. While this process also reduces the cost for the Factor to provide the risk assessment on the invoice, it limits the scope of potential customers to those willing to factor all invoices rather than a small selection.
The ability to factor a single invoice increases the potential customer base but presents the concrete risk of double pledging. If we are able to resolve this problem, we could have a system that can easily fund single invoices while also protecting their authenticity. We can leverage some of the interesting features of a cryptographic and distributed digital system to bring several advantages:
1. certainty of the uniqueness of the invoice.
2. the acceptance of the buyer
3. the assurance of the advance of that invoice (i.e. it was anticipated by bank x on that day y).
While we resolve our first problem we also need to consider an important constraint that comes from the Revised Payment Service Directive ( legislation which sets regulatory requirements for firms that provide payment services) which states that the transaction must be open and all the parties involved should be able to read it. In other words, access to the system cannot be determined in a Role-Based Access Control or in an Attribute-Based-Access Control, under suitable for the purpose as they are both based on attributes and roles of the subjects whereas we need to consider the relationship of the subjects with attributes of the object (namely the invoice), keeping non transactional information separate and cryptographically secured.
Blockchain-based FinTech is usually used for a wide range of distributed financial applications but most of them store data in clear and the blockchain only provides integrity and fault-tolerance.
There are also private blockchains which act as Central Authority (gate keepers) and decide on who can join the platform from the outside. In these kinds of protocols the network nodes can read sensitive data but they cannot alter or contaminate it.
A lesser-known technique among crypto developers is the cryptographic accumulator which is a little primitive but comprises interesting properties that can be used to build various zero-knowledge proof systems. But since we need to consider the relationship of the subjects with the attributes of the object (the invoice) we cannot consider cryptographic accumulators either which can only serve for proving membership in the system.
Secure Multi-Party Computation (SMPC) is a generic cryptographic primitive that enables distributed parties to jointly compute arbitrary functionality without revealing their own private inputs and outputs.
According to the Secure Multi-party Computation theory (SMPC), any functionality is securely realizable via a distributed protocol functionalities such as setting, assuming honest minority (resp. majority). The recent progress on efficient implementations of general-purpose MPC protocols opened up the way to advanced decentralized applications, e.g. to privacy-preserving data mining, making it possible to create a distributed and open protocol for a Global Invoice Finance marketplace.
Lock-ins, Minimum Factoring Requirements, Hidden Costs, Contractual Binds, Personal Guarantees are just few of the challenges which every Small Medium Enterprise encounter when it comes to Invoice Finance facilitated by archaic legacy credit providers.
If you would like to read more about how these issues can be solved, please read more at www.clearfactor.io
About Clear Factor:
London-based Clear Factor Limited is building an open, transparent, decentralized and global ecosystem to bring fast low-cost invoice finance to small and medium businesses (SMEs) requiring cash flow while taking away the contractual binds, minimum factoring needs, charges, exit barriers, personal guarantees and performance-measures imposed by banks. Combining reward-based underwriting, CF-DF scoring, replication of successful investment strategies, a transparent auction and consensus between investors and the SME, Clear Factor will allow investors access to one of the safest and shortest time-framed investment instruments that have been hitherto available only to large funders.
Clear Factor aims to disrupt these global invoice finance markets and has built a passionate team with extensive experience in invoice finance, insurance, payments infrastructure, IT development, cybersecurity, decentralized protocols, and digital-asset trading. Clear Factor is building its MVP in partnership with Decimal Factor and Electi Consulting, who are both Clear Factor shareholders.
