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Demystifying Blockchain

With Blockchain Technology, Invoice Factoring Becomes Faster, Easier, and More Trustworthy

Matt Coolidge

SVP of Global Communications

Editor’s note: This article is a part of our content series, “Demystifying Blockchain,” where we explore how enterprise and government teams are using blockchain technology today. By dissecting real-world examples, we demonstrate the impact of the technology across industries and the value blockchain is bringing to all kinds of businesses. Read more from this series here.

Blockchain technology is improving invoice factoring—the process by which one company sells its unpaid invoices to another company to bolster short term cash flow—by infusing greater levels of visibility, trust and control into the process. And it’s doing so with more cost-efficiency than was ever previously possible. 

How exactly does factoring work? 

In short, a business sells its outstanding invoices (what it’s owed by its customers) to a third-party “factoring firm" in exchange for immediate cash at a discount to the total invoiced amount. This gives a given business access to needed liquidity in the short term, while the factoring firm assumes responsibility for collecting payment from the business’ customers. 

Invoice factoring is a much more common accounting practice than many realize. Think, for example, about a restaurant or retail store: After a customer makes a purchase, money from the sale almost immediately transfers to the company's account. But other businesses, such as consulting services, marketing agencies, or third-party logistics providers rely on invoice processing for payment—typically a much longer and more complex payment process. 

In the not-uncommon event that closing out an invoice takes longer than expected, organizations’ bills can exceed their available cash and hinder operations. This is especially challenging when you consider large-scale organizations that are working with hundreds or even thousands of external vendors or clients at any given time. 

The market for invoice factoring as a means of short term business financing is expected to more than double over the next decade, reaching $4.6 trillion by 2031. Although accounting for a third of the factoring customers today, demand from small and medium-sized enterprises (SME) is expected to grow at a higher than average 11.5% CAGR through 2031.

Despite the breadth of the opportunity, invoice factoring is replete with inefficient manual processes prone to error and delay. First, factors must liaise and coordinate not only with the businesses they lend to, but also with the web invoiced customers. Verifying invoices also makes fraud a considerable risk. Plus, factoring rates and fees can be confusing and costly. 

Blockchain technology is alleviating many of these challenges, transforming factoring into an easier and more cost-efficient process for both factoring firms and their customers: 

  1. Enhanced cash flow analytics and risk modeling

    By capturing the live flow of customer payments for factored receivables, factoring firms can update assets and liabilities and risk pricing in real-time time. This enables them to reduce costs, increase capital efficiency, improve portfolio structuring, and liquidity management.
  2. Programmable transaction processing 

    Blockchain technology provides factoring firms and businesses a single and transparent database for transaction processing. Beyond enabling instant settlements and eliminating data silos, this also allows organizations to program smart contracts in a manner that enhances transaction observability, verifiability, privacy and enforceability. And with Casper’s upgradable smart contract model, these conditions can always be changed, even after a smart contract has been deployed.
  3. Easier verification and fraud prevention 

    Because transactions by all parties are all documented on the blockchain, invoice verification becomes easier, too. All stakeholders can detect actions taken by financiers, businesses, and their clients—such as whether the factoring firm accepts a submitted invoice or each individual signs a contract of the sale—without having to follow up for confirmation. And because transactions on blockchain technology are immutable, data is protected from tampering.
  4. Stronger data access management 

    Additionally, blockchain technology enables users to enlist access permissions, so factoring companies can control which data transactions companies and customers can see. This helps make data storage even more secure.

For companies in highly regulated industries, such as healthcare or government, this additional level of data security can help decision-makers feel better about choosing a factoring service that operates on blockchain.

Pioneering a new model for invoice factoring

To help businesses improve cash flow and maintain revenue stability, organizations like Nucleus Finance, an API-native fintech company that’s built on the Casper network, are already seeing value by adopting blockchain technology.

Nucleus Finance provides businesses and factoring firms the tools to issue, tokenize, transfer and audit their assets and liabilities in real-time. The company leverages open-source, standardized algorithmic contract types to empower life cycle management and risk analytics businesses, investors and regulators. It relies on Casper Labs’ blockchain network to offer enhanced analytics and risk management tools.

Casper is a blockchain built specifically for enterprise-grade environments, including upgradeable smart contracts that allow financial services providers offering factoring to change their workflows as organizational needs shift.

To ensure companies get the most of their blockchain solution, Casper Labs also provides developers with hands-on guidance, enabling our customers to bring greater value to their business and the clients they serve.

Learn more about how businesses are working with Casper Labs to realize benefits of enterprise blockchain adoption. 

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