Elevating SMEs with Invoice Tokenization
Small and medium-sized enterprises (SMEs) are the backbone of many economies around the world, providing employment and sustenance to families, and driving innovation and progress in their communities. These companies, especially those operating in weaker economies, often face difficulties accessing financing, particularly when it comes to securing short-term cash flow. The emergence of tokenization of real-world assets (RWAs) through the use of blockchain technology is changing that reality, providing SMEs with new ways to access financing in a quicker and easier way. Currently, there is a huge trade finance gap, estimated at $2 trillion globally, between the amount of credit that is available in the market and the amount that companies need for financing. Almost half of all formal micro, small and medium enterprises in emerging countries have unmet financing needs, not accounting for informal structures, which have even more difficulty in accessing financing.
Asset tokenization is the process of issuing digital tokens that represent tangible assets on a blockchain. Examples of RWAs that are often tokenized are real estate, commodities like gold, oil and carbon credits, and accounts receivables like invoices. This has the power of providing liquidity to otherwise illiquid and non-fractional markets, allowing businesses to monetize their assets and making investments in them more accessible to a wider range of investors, through the removal of intermediaries and the reduction of bureaucracy. The use of Smart Contracts, programs that run on a blockchain when certain predetermined conditions are met, can allow for the automatic execution of dividend payments, token trading and compliance mechanisms. Tokenization also makes SMEs less dependent on informal lenders, whose dependency often leads to exploitation of families, rise in crime rates, and not allowing poorer communities to be lifted out of poverty.
Web3 startups like Defactor [Official] Labs are leveraging accounts receivable like invoices to provide alternative financing, by bringing to blockchain the concept of factoring, in which a business sells its accounts receivable to a third party to meet its short-term liquidity needs. Their platform enables companies to convert their outstanding invoices into digital tokens, which can be sold to investors, providing immediate access to cash flow. This is particularly important for SMEs, which often have limited resources and cannot afford to wait for long periods to access financing. The issued tokens are backed by the value of the outstanding invoices, and investors can fund them through smart contract infrastructure, providing a return on investment when the invoices are paid.
Throughout 2022, Defactor [Official] Labs onboarded four new clients and facilitated a total of $24,640,955 in transactions through their platform. By partnering with Centrifuge Protocol, a decentralised finance (DeFi) lending protocol, they have enhanced the onboarding processes for new asset originators, entities that aggregate real-world assets, and that are seeking to obtain liquidity. One of the significant advantages of using a blockchain-based platform is the speed at which companies can access financing as they can offer their outstanding invoices to a broad range of investors around the world, regardless of location or jurisdiction, on a market that is available 365/24/7. This provides SMEs with quicker and easier access to financing, enabling them to better manage their short-term cash flow and operate more efficiently. An important requisite for mass adoption of this alternative financing model is having platforms with user-friendly interfaces, that are highly accessible with a low barrier to entry, making it easier for SMEs to get started with tokenization of their assets, even if they have limited experience with blockchain technology.
By democratising access to financing, invoice tokenization platforms are helping to level the playing field for SMEs, enabling them to compete with larger companies on a more equal footing. The use of blockchain technology for the tokenization process also provides for increased transparency and security as all transactions are recorded on a tamper-proof record of ownership and transfer of tokens. This enhances investor confidence and reduces the risk of fraud, increasing the efficiency of the financing process. Through partnerships and active collaboration with entities like 2Tokens Foundation and the International Token Standardization Association, these Web3 startups are working hard to promote the growth and mass adoption of tokenization of RWAs, through the establishment of industry token standards and best practices and helping to create a more robust and sustainable ecosystem for tokenization, which is critical to the long-term success of this financing model.
Overall, tokenization of invoices is changing the face of financing for SMEs, providing a faster, more accessible, and more transparent alternative to traditional financing methods. As blockchain technology continues to evolve and as more companies and investors embrace this new financing and investing model, it is likely that we will see even more innovation and development in this area, leading to a more dynamic and efficient financing ecosystem. Tokenization of RWAs is poised to be one of the most significant trends of 2023 and beyond. As blockchain technology continues to mature and Smart Contracts’ development less expensive, it is expected that new services and companies will appear on the market, further democratising access to financing.
