Invoice Financing

Invoice financing is a general term used in asset based lending for products which allow companies to get finance for their slow-paying accounts receivable. Once a buyer receives goods, a buyer has 90–120 days to pay for them. But is there any way that the seller can get their funds faster? Well, this can be achieved by selling invoices to a factoring company in exchange for immediate payment. But why do companies need their invoices paid faster? For cash flow reasons. They need funds in order to buy materials, pay for the production of goods or even to pay their employees’ salaries. And this is precisely the gap that the Hive Project is looking to fill. Through Hive Project, an entirely new market is opened up which provides liquidity to SMEs that are not able to get invoice factoring from traditional institutions. Put simply, it’s a game changer for the industry.

What is invoice factoring?

Invoice factoring is a form of invoice financing that allows companies to sell their accounts receivable to improve their working capital. This type of financing provides business with immediate funds that can be used to pay for company expenses.

Factoring is easier to obtain than conventional financing because you are technically selling an asset rather than getting a loan. The most important criterion to fulfil is that the invoices submitted are from creditworthy commercial clients. This makes factoring the perfect solution for SMEs that do not have substantial assets or a long credit history.

Traditional invoice factoring

In traditional invoice factoring, invoices need to be verified before being funded. The approval process is carried out manually, requires a lot of paperwork and still does not protect a lender from refinance. And this is precisely where the benefits of block chain and smart contracts come into play.

Block chain’s role in invoice financing

The key advantages to using block chain for storing and tracking invoices in the invoice factoring process are as follows:

1. Full business transparency is ensured

2. Refinancing is prevented (double spend/double sell)

3. The lending process is fully automated

The figure below shows the high-level communication flow between interested parties and crypto updates, all the way through to a tokenized invoice.

Hive Project architecture

Hive Project’s underlying architecture is based on an Ethereum smart contract. As previously mentioned, this architecture yields full transparency of events along the supply chain, increased process efficiency, a reduced risk of fraud and dramatically lower costs.

The Hive Project smart contract design follows a modular contract structure, making it highly reusable and easy to upgrade. All of the modules will be written in Solidity.

Exchanging information related to these events in a distributed ledger facilitates the trigger events that need to take place for the goods to arrive at their final destination, a service to be fulfilled and for the suppliers to receive payment. However, the block chain’s ability to facilitate these trigger events does not end with the mere exchange of information along a supply chain. Smart contracts not only allow trigger events to take place, they ensure they are carried out automatically.

A smart contract is a tokenized computer process that is stored on the block chain and automatically carries out predetermined functions once a triggering event has occurred.

A smart contract can include multiple parties such as, for example, lenders, borrowers, buyers, sellers and others. Once tokenized, they cannot be altered. For example, if a smart contract is entered into between a lender and a seller which indicates that both parties have agreed on the borrowing conditions, the smart contract will automatically disburse a payment event that requires action to be taken by the bank. The payment is automatically remitted once confirmation has been entered into the system. With a smart contract, legal terms and conditions are embedded in the computer code, which enables the automatic execution of functions defined by the contract itself.

Since the contract will not allow for additional financing to be received for an invoice that has already been financed, this architecture also prevents duplicate invoice factoring. Invoice duplication has been a significant obstacle preventing invoice factoring solutions from being more readily available to SMEs, but the incorporation of block chain technology eliminates this issue.

Hive Project will also use the InterPlanetary File System (IPFS). IPFS allows static files to be stored in a distributed file system and uses distributed hash tables to distribute the files. Hive Project uses the IPFS to store all static files and event meta data.

All of the data stored on the block chain is protected, and only those parties which are approved by the vendor will be able to view the data it has made available to be seen. Control over security is in the hands of vendors, with a full range of settings available. Only the core data for the invoices that the vendor wants financed will be available to be viewed by lenders.

In order to compensate for the limitations of Ethereum and IPFS, both of which come without search capabilities, Hive Project will develop a distributed, scalable on-chain search functionality which will be used to query invoice data and associated event descriptions.

The figure below shows three different application instances that are built on top of the Ethereum Virtual Machine, addressing the need for three completely separate roles in the invoice factoring process.

Hive will provide integration with existing invoicing systems such as Intuit QuickBooks, StageOne, Navision, SAP and the Canadian based FreshBooks. Hive Project will also be integrated with various local invoicing systems present on local markets and widely used by SMEs. Part of our global expansion plan involves the rollout of integrations with localized ERPs (invoicing and accounting systems). The goal is to continue with this process and ensure broader support by enabling integration through Developers SDK and contributions by the open source community.