But now that Bitcoin and
several other cryptocurrencies have been battle-tested as acceptable forms of
payment, entrepreneurs are betting that they might be the answer for SMEs with
outstanding accounts receivables.
Rapid Industry Growth
Invoice factoring is the
most popular method of invoice financing; it involves companies selling their
invoices to a factoring company at a discount. Factoring companies view unpaid
invoices as assets, especially if they belong to creditworthy customers.
Assuming it is a matter of when, not if, the invoice is paid, financiers are generally
willing to provide liquidity to small businesses in exchange for a portion of
creditworthy customers and long billing cycles are the most frequent users of
invoice factoring. Think of logistics companies that need to pay a large number
of drivers, companies with long government contracts, or textile manufacturers
that have to purchase all of their raw materials far before any sales are
Globalization and the
growing profitability of SMEs have driven the increasingly strong demand for
invoice factoring. Most banks require significant collateral and a long credit
history for any type of business financing. While it’s become more economically
viable to run a small business, credit restraints have not changed. It is this funding
gap that has created a substantial need for short-term financing. Similarly,
increased global commerce has accelerated faster than merchants have been able
to collect payments from touch points around the world. In short, our current
financial infrastructure has not been able to innovate at the pace necessitated
by the growing world economy.
Invoice factoring is
rapidly growing on an international scale. United Capital estimates the global invoice factoring volume is
currently $3 trillion, and is growing at an annual rate of 24.8 percent. Asia
and Europe make up the two largest factoring markets in the world, where numerous
countries are experiencing over 20 percent annual growth. Most notably, China’s
economic dominance has paved the way for a 54 percent annual growth rate over
the last five years.
These extremely valuable
solutions are not without their defects, however. Invoice factoring is not
cheap — creditors can demand up to 10 percent of the receivables as commission.
For small businesses that already have trouble paying their immediate bills,
these fees can stand in the way of their survival. The verification process is
also arduous and relies on extensive labor. Checking borrower credit scores,
confirming delivery of goods and services, and assessing accurate invoice terms
involve handwritten signatures and require considerable resources which drive
up factoring premiums.
A Better Way
Blockchain technology is
well equipped to solve these problems and is being proposed as a solution for
small businesses with smaller short-term capital needs. Blockchains are great
for tokenizing financial assets and enforcing complex changes in ownership.
Given the vast number of intermediaries necessary to manually assess the risk
of each invoice, factoring can be made much more efficient and equitable by
decentralizing the verification and payment functions.
technology, every invoice is unique and can be assessed by a credit scoring
algorithm, providing automatization and transparency to the whole invoice
financing process,” noted Jure Soklic, cofounder and CEO of the Hive
Just as initial coin
offerings (ICOs) have surpassed venture capital — the most prevalent traditional
financing model — Soklic intends for Hive to help SMEs move beyond traditional
banking for their financing needs. A peer-to-peer marketplace powered by the
Ethereum blockchain can connect growing small businesses with a burgeoning
crowd of investors. Liquid blockchain assets allow virtually anyone to
participate in the invoice factoring process.
Businesses are able to
upload their invoices with full confidence that their financial information
will remain cryptographically hidden throughout the financing cycle. Hive
assesses the creditworthiness of borrowers through its own adaptable algorithm,
rather than via outdated manual calculations. Invoice verification issues are
alleviated through enterprise resource planning (ERP) integrations which allow
users to automatically upload all necessary information for evaluation.
Similarly, all financial agreements are recorded within and enforced by smart
applications like Hive are pushing the boundaries of peer-to-peer financing
structures. Reminiscent of how venture funding was once exclusively reserved
for venture capital firms but eventually became available to a range of
investors, blockchains and liquidity in crypto markets promise to democratize
the invoice factoring industry.
With numerous new
applications going to market, at least a handful are bound to fail. We can,
however, be certain that industries rife with counterparty risk and financial
exchanges are off to a good start.