What is invoice financing and why is blockchain the missing link?
As mentioned in our previous blog, financial institutions now offer invoice financing solutions to help increase the purchaser’s working capital and the supplier’s liquidity.
Invoices are sold at a discount in order to improve liquidity on either side of the chain. This helps businesses mitigate currency volatility, forge better relationships with their suppliers and, of course, improve their liquidity.
Common supply chain finance strategies include factoring and invoice discounting. Receivables are sold to a bank at a discount as soon as they are approved by the buyer. The bank then commits to pay the company’s invoices to the suppliers. Finance providers charge borrowers interest rates based on the time value of money, as well as the risk or uncertainty of future cash flows.
Sounds great! So, what’s the problem?
Well, even though this is of course a step in the right direction, things are still far from perfect. The process still takes too long. It’s cumbersome, unwieldy, costly and error strewn. To make things worse, usually only large invoices from well established companies are taken as collateral due to the massive amounts of work involved in checking each invoice and the scope for duplication and human error. The calculation of contras, debtor concentrations and dilution levels, all of which can have a significant effect on the amount of credit available, takes time, effort and incurs higher costs.
This unfortunately leaves most SMEs out in the cold.
Imagine how the economy would surge ahead if all this potential liquidity became available to the SMEs that need it. The mind boggles at the impact this would have. But is this possible?
Yes, it certainly is. And that’s precisely where HIVE comes in. Although factoring as a concept is sound, there is a crucial technological component that is missing. That component is blockchain technology and smart contracts.
More about invoice financing and HIVE in the next blog post.
More info on: https://www.hive-project.net