Supply chain finance (SCF) is a set of financial solutions aimed at optimizing cash flow and working capital in a supply chain. It involves collaboration between buyers, suppliers, and financial institutions to improve the efficiency and liquidity of the supply chain. With the rapid advancements in technology, the use of blockchain tokens and asset tokenization are now emerging as the pillars of a new state of the art in supply chain finance.
Invoice financing enables businesses to obtain immediate cash by selling their outstanding invoices to financial institutions or third-party companies at a discount. This helps improve cash flow, mitigate the impact of delayed payments, and bridge short-term funding gaps. Invoice financing is also known as accounts receivable financing.
Reverse factoring (confirmatory payables)
Reverse factoring, also known as confirmatory payables, is a supply chain finance arrangement initiated by the buyer, in which a financial institution pays the supplier on the buyer's behalf. The buyer then repays the financial institution at a later agreed-upon date, often with extended payment terms. This helps suppliers get paid more quickly while providing buyers with more time to settle their obligations. Reverse factoring enhances liquidity, strengthens supplier-buyer relationships, and reduces risk in the supply chain.
Inventory financing is a short-term loan or line of credit provided to businesses using their inventory as collateral. This helps companies fund their operations, fulfill orders, and manage cash flow by leveraging the value of their inventory. It is particularly useful for businesses with seasonal sales or those experiencing rapid growth.
Trade credit insurance
Trade credit insurance is a risk management solution that protects businesses from the risk of non-payment by their buyers. It covers the seller if a buyer defaults on payment due to insolvency, bankruptcy, or other financial difficulties.
Asset tokenization involves converting physical assets or rights to assets into digital tokens on a blockchain platform. This can increase transparency, security, liquidity, and efficiency in supply chain finance. Besides the specific benefits tokenization brings to each of the solutions above, the potential emergence of secondary markets across supply chain finance is probably the most important one, enabling investors to easily trade digital tokens.
Invoice financing tokens: Tokenizing invoices can create a more efficient, transparent, and secure marketplace for trading accounts receivable. Registering invoices on tokens reduces the need for intermediaries, lowers transaction costs, and enables real-time tracking of invoice ownership. Tokenized invoices can also be easily divided into smaller parts, increasing liquidity in the invoice financing market and allowing investors to diversify their portfolios.
Reverse factoring tokens (confirmatory payables): Using tokens to digitize payables can streamline the process by automating payment terms, providing real-time visibility of payment status, and reducing the risk of fraud. Smart contracts can automate the payment process, executing transactions only when predefined conditions are met, such as the buyer's approval of the goods received.
Inventory financing tokens: Tokenizing inventory assets can increase liquidity by allowing lenders to sell the right to be paid by the inventory's owner. The ability to easily sell the credit right in the form of a digital token protects both lender and borrower from lender default risk. The most salient concern in this case however is inventory valuation and availability in case its owner is required to compensate lenders. Blockchain can help ensure the conditions of the inventory, certifying location, availability and so on, although doing this at scale will take time.
Trade credit insurance: The increased transparency and security provided by tokenization across supply chain finance could indirectly but significantly contribute to better credit risk assessment and management.
The use of blockchain tokens has the potential to greatly improve key aspects of supply chain finance, increasing liquidity, transparency and efficiency, while reducing risk. As businesses and financial institutions explore and adopt tokenization, we can expect a more streamlined, secure, and efficient supply chain finance landscape, with innovations like conditional tokens.
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