How NFTs will revolutionize financing for invoices

If you own a (new) business you might have a need for liquidity while waiting for your invoices to be paid. Getting a credit line is often an expensive ordeal complete with exorbitant interest rates. When turning to other solutions offered by your bank you will run into long, cumbersome and costly processes and still be uncertain whether you will qualify. In a world that aims for more financial inclusion that needs to change and DeFi might just provide the solution. In this article we will explore the situation as it is and look at an exciting solution powered by decentralization.

The traditional invoice

In traditional finance (TradFi), contracts are signed between lenders and businesses to conduct either invoice financing or factoring. In invoice financing, the invoice is given as collateral., 

On the contrary with invoice factoring, the invoice are Iin factoring it is sold along with all the rights associated with it, such as the right to apply late fees. The lender does not just accept any invoice, but does a thorough cashflow check and performs an assessment of counterparty risk to determine which invoices are allowed to be financed. 

The collateralization or sale of the invoice often happens through e-mail or another channel defined by the signed agreement between business and lender. If any fraud should occur during this process, the lender can swiftly end the agreement and start the necessary legal actions against the business. Simple enough, right?

Some caveats

When applying for invoice financing or factoring there are many hoops a business must jump through. 

To start off a thorough analysis of a business’ cash flow and a very close inspection of the balance sheet make a business almost feel like they’re being audited and can prove to be a long and cumbersome process, not only bringing extra costs for the lender (who has to hire financial experts), but for the business too, as these extra costs bump up the price they pay for these services. 

Another thorn in the eye of many businesses is that there’s a minimal turnover needed before you can even think of applying for these services, this instantly excludes smaller businesses. 

A third limitation is that only a select few counterparties are accepted by the lender, often opting for invoices of big and robust entities and corporations while excluding smaller businesses with an immaculate payment record. 

Another problem with the whole process is that it is sensitive to fraud, a lender can be misled with false invoices, diverted receipts, hidden disputes, re-aged invoices and possibly even collusion. 

All of this is further exacerbated complicated by a lack of transparency on the business’ side while lenders are in the dark. This whole ordeal makes invoice financing and factoring sound rather inflexible and reserved for larger businesses and corporations with high levels of trust.

Enter NFT Invoicing

To set up a similar, but radically different system that eradicates these problems utilizing the power of blockchain technology, decentralization and triple entry accounting, the invoice must first transform from a simple PDF to an NFT (or Non-Fungible Token). 

Why, you ask? 

Well, firstly the NFT provides an immutable proof of ownership of the invoice. This is paramount to be able to not only prove, but also transfer ownership. In turn this transferability of ownership facilitates invoice factoring. 

Secondly, it allows the invoice to be inserted into a smart-contract as collateral. This is crucial when building an invoice financing platform.

Some examples of unique features

Let’s take a look at some unique features of tokenizing this enables in an invoice financing/factoring setting:

• You are able to get financing for your invoice from any willing lender on a decentralized marketplace. The costly cumbersome process of applying for a credit line with a bank is gone!

• After you’ve sold the invoice to a lender, he can sell it to someone else, and so forth, creating unique market dynamics when a lender has taken on too many invoices and desperately needs liquidity himself.

• A lender can change the currency they receive the invoice in, providing options for international financing.

• The smart contract can automatically route the payment of the full invoice or the interest to the correct addresses, the payer is none the wiser.

• When selling the invoice, the payer can be notified of the change of ownership when he gets contacted by the lender with a payment reminder.

• The NFT can show whether the invoice is accepted or not by the payer, this creates an extra layer of security and prevents fraud.

• When attached to a reputation system, the counterparty risk can be assessed instantly based on past payment behavior and payment volume of the payer. This creates peace of mind for the lender.

A story of Alice, Bob and Charlie

Alice sends an invoice to Bob with payment due in 14 days, but Alice has an immediate need for liquidity. Alice mints an NFT of her accepted invoice through Request Network and offers it up on the decentralized marketplace. Bob has a great payment record, so Alice’s invoice is bought up almost immediately by a lender named Charlie through factoring. 

When Bob pays his invoice 14 days later, the money automatically goes to Charlie’s address. Should Bob not pay his invoice on time, then Charlie can access a reminder system using his NFT, proving he has the right to send Bob reminders to claim the money for the invoice.

It’s amazingly simple and cost effective for all parties involved!

A step into the future

Opening up these use cases in a trustless and decentralized environment allows for businesses across the globe to have access to instant liquidity when needed. 

The tokenization of invoices is the first crucial step towards building this new and exciting financial infrastructure. In this regard Request Network and Request Finance sit at the forefront of this financial revolution where financing is no longer restricted to big businesses and big lenders, but rather an accumulation of businesses and smaller investors across the globe in a borderless environment.