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Ashutosh Kumar May 10, 2020 0

Benefits of Blockchain in Invoice Discounting

What are the benefits of blockchain in invoice discounting? This question is being asked by many businesses worldwide. In this article, we explore the problems and inefficiencies within the invoice finance industry as well as the benefits and solutions blockchain provides.

Here are some key benefits of blockchain in invoice discounting:

  • Automated documentation

  • Real-time settlement of transaction

  • Real-time tracking of the transaction

  • Fraud Proof

  • Risk profiling of clients

  • Distributed ledger technology

What is Invoice Discounting?

Invoice Discounting is a funding option provided to businesses that are issued by finance companies. Under the Invoice Discounting process, the business uses the unpaid invoices of its customers as collateral to access advances on cash funds that improve the working capital and cash flow position of their business.

Invoice Discounting significantly improves the cash flow and growth of a business. This is because the business obtains fast funding as immediate cash rather than having to wait the usual 30-60 days. This improved cash flow is critical for businesses as Businesses can then invest in growth. The two major downsides of Invoice Discounting is the cost and the reduced funding capacity.

Current Invoice Finance Process

The process of invoice or bill discounting is simple and logical.

  • The seller sells the goods to the customer on credit and raises invoices on the buyer.

  • The buyer or customer accepts the invoice and acknowledges paying on the due date.

  • Seller approaches the financing company with the invoices to discount it.

  • The financing company ensures the legitimacy of the bill as well as of the buyer.

  • Funds are made available to the seller after deducting the appropriate margin and fees as per the norms.

  • The seller gets the funds and invests it for further business.

  • On the due date of payment, the seller collects the money from the buyer.

Current pain points in this process:

  • Manual Documentation – Heavy Manual Documentation is required throughout the procedure of invoice finance, that is, from raising an invoice to submission of purchase orders and proof of delivery. This makes the process tedious for clients. Also, Information is often lost and is a frequent pinch point in the audit process. Documentation must be saved manually onto Client drives taking up server space.

  • Time-consuming process – Due to the tedious manual process of the transaction and lack of automation, there is no instantaneous way of approving invoices immediately. Smart contracts can be set up to release funds as soon as certain criteria have been met.

  • Potential of fraud – Currently only a random sample of invoices are verified against their back up the paper trail, therefore there’s still scope for fraudulent invoices to be funded against. Blockchain creates an end to end trusted verification that will assure that Purchase Order, Invoice, and Proof of delivery are uploaded to the blockchain and verified by many participants.

  • Lack of mechanism to track the invoice throughout the process - Currently the participants, client end debtor, and the bank cannot track the transaction in real-time. The status of the invoice process is only known if communication is shared.

Invoice Discounting on Blockchain

Blockchain Invoice Finance procedure:

  • Purchase orders are done through banks’ distributed blockchain ledger.

  • The client carries out works, as soon as the P.O.D is uploaded to the blockchain

  • Invoices are raised to Blockchain.

  • No verification required as all of the above visible as blocks on the chain are independently verified via end customer and client communication on the blockchain.

  • Instant funding – a smart contract could be set up to pre-pay invoice once verified & when criteria are met.

Benefits of Blockchain in Invoice Discounting:

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  • Automated documentation – Blockchain eliminates the manual labor involved in the invoice discounting process and the transaction becomes paperless.

  • Real-time settlement of transaction – Client can transfer invoices to the blockchain network, smart contract rules can be triggered meaning invoices are discounted and funds disbursed to the Client real-time.

  • Real-time tracking of the transaction – With the transaction being on the blockchain network, all involved relevant parties can view and verify the processes. There is only one source of truth and transactions cannot be processed further unless all relevant parties agree to authenticate it.

  • Fraud Proof – Blockchains Distributed ledger technology means all relevant parties can view and verify processes, that makes the process fraud-proof.

  • Risk profiling of clients – Due to every transaction stored on the blockchain it can be used alongside artificial intelligence to identify payment profiles and risks of end debtors.

  • Distributed ledger technology means that all parties have access to real-time and all share the view of the transaction. However, they can be limited to seeing the parts they need to make their contribution.

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