How Is Technology Transforming The Invoice Discounting Space?

In theory, invoice discounting is an excellent financing solution. Cash-strapped businesses can release their locked-away funds in unpaid invoices at a discounted rate to meet several short-term obligations.  Be it taking up a new project or paying suppliers in advance; invoice discounting plays a vital role in maintaining a healthy and smooth-running supply chain.  However, manual invoice discounting is full of frills, which can be an impediment to seamless financing and management of day-to-day operations. In this regard, technological disruptions in this discipline have brought about numerous changes.  Blockchain and Machine Learning have been at the forefront of this change, allowing this space to be more dynamic, efficient, and faster. 

Drawbacks of Conventional Discounting

Before delving into the nitty-gritty of how technology has revolutionised this system, it may be pertinent to look at a few areas where traditional invoice discounting lacks.

• Time-Consuming Process

The primary issue that plagues this financing option is the verification process. Financiers, for obvious reasons, cannot blindly trust an enterprise to present legitimate invoices.  Thus, lending institutions need to reconcile accounts receivables of the seller with the accounts payable of the buyer to verify the validity of submitted bills.  Now, this process can take a considerable amount of time, leading to delay in fund disbursal. Since cash flow requirements are time-sensitive, enterprises found it challenging to turn to invoice discounting. 

• Eligibility

Financiers conventionally examine a business’s financial records, alongside credit rating to determine its eligibility. However, these factors do not always present the true merit of an enterprise.  Besides these, traditional financiers took to a static discounting rate, when sanctioning credit against invoices, without sparing any consideration for several micro and macro factors at play in a supply chain. 

Technological Advancements In Invoice Discounting

Blockchain technology has been a leading factor in boosting invoice discounting’s popularity over recent years. How?  Blockchain is essentially a decentralised ledger where transactions once recorded, cannot be tampered with. And invoice discounting is a system that involves more than one stakeholder. Hence, a public ledger that cannot be manipulated is an apt technology in this respect.  Besides blockchain, Machine Learning has also contributed to a more dynamic invoice discounting space. Fintechs like KredX have deftly integrated these technologies to create a seamless and hassle-free financing solution for SMEs. Take a look at the advantages these technologies bring – 

• Streamlined Verification

Invoice discounting generally involves a company submitting all its outstanding bills, unless it is going for selective financing. It’s safe to assume that those invoices have been drawn up to multiple clients.  Blockchain technology simplifies this multiple-point verification and reconciliation process by connecting the buyer’s and sellers’ networks.  It enables buyers and sellers to reconcile their statements in real-time via this technology immediately as a transaction takes place. Since the lending institution sits right in between these networks, it can verify all details instantly by accessing the public ledger without risking a tamper. 

• A Greater Ambit

Technological advancements in this discipline have broadened the inclusivity of invoice discounting. Financiers do not solely rely on the financial records of a company to make a call.  Since all documents are readily available in blockchain, any company with unpaid invoices can approach a financier for cash flow solutions. It also does away with the concern of invoices’ credibility because there’s no scope of data manipulation with blockchain in play. 

• Uniformity Across The Board

There’s no standard format for drawing up an invoice, and companies and other participants of a supply chain can draft their bills differently. Machine Learning enables systems to convert discrepant invoice formats into a uniform one.  This way, financiers can verify documents more easily, in turn, expediting the fund disbursal process. 

• Dynamic Discounting Rates

A flat discounting rate is somewhat at odds with the financial ecosystem of a supply chain. It’s influenced by a host of factors, both micro and macro, which remains unaccounted for under the traditional approach.  Macro factors, like geopolitical tensions, change in exchange rates, etc. can significantly influence the dynamics of transactions.  Thus, it’s only sound to discount invoices at a rate reflecting the heft of these factors. Machine Learning enables financiers to offer discount rates customised and suited to the borrowers.  Besides these, B2B integrated cash flow solutions providers like KredX offer companies a platform to utilise their unpaid invoices to gain access to working capital. Hence, it greatly benefits companies in terms of a faster and more dynamic financing process.  Bottom Line The technological strides in the invoice discounting space have worked wonders to meet the credit gap faced by small and mid-sized enterprises. These help financiers do away with the scepticism of extending funds to SMEs, who lack credit history or properly audited financial records. Thus, creating a more holistic financing system.