Blockchain based Trade Finance and Invoice Factoring
DeFi, General, Lending - August 25, 2020
What was the actual use-case of blockchain? Bitcoin and other cryptocurrencies leveraged it to use it to make things efficient. One of the most obvious use-cases of Bitcoin and blockchain is invoice factoring.
The invoice factoring has two universal features which blockchain solves for – debt and trade. First, invoicing is done using debt. Debt means money that you don’t have but owe. The whole point of invoicing is presenting an IOU over actual payment. Second, invoicing is the preferred payment system for global trade.
Through blockchain technology, both trading and invoicing can be merged to create an efficent system. This can be used as an alternative to the banking system which creates a lot of overhead fees and friction, making an expensive transaction even more costly.
Blockchain bring value and distribution
Blockchain technology brings in two very important concepts into invoicing – tokenization and digital currencies. Each company (using invoice factoring) can issue tokens to investors. The price of these tokens increase as the company receives money from orders completed. This money is used to pay back the invoice through digital currencies. This system runs smoothly through blockchain technology.
This concept can be further advanced to bring in lending and borrowing. Interest payments can be locked into smart contract and insured through third-party verfiers.
That’s not all. Blockchain technology can also integrate smart contracts. These are auto-executing contracts based on pre-defined functions or clauses. These can be integrated into trade financing and factoring. When the goods are received in part, a part of the payment will be released. Blockchains like Ethereum and the Binance Smart Chain already have smart contracts. Layers of inusrance, auditing and more authenticating services can be provided over this to enhance security.
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