Blockchain in Invoice Factoring: A Pragmatic Transformation

Blockchain technology is projected to expand nearly 25 times in market value within the next five years, rising from $57.72 billion to $1.43 trillion, according to Grand View Research. The massive growth is driven by a variety of factors, with virtually all industries adopting it to some degree. Factoring is no exception. Below, we’ll explore the rise of blockchain in invoice factoring, where things sit today, and what we can expect from this booming technological advancement going forward.

The Basics of Blockchain Explained

You’ve probably heard the phrase “blockchain” before. It came out of nowhere around 2017 and quickly became the buzzword of our time. But, all that hype has led to a lot of myths and misconceptions about it, so let’s break down some of the background in a way that’s easy to understand.

Blockchain Defined

“Blockchain is a decentralized digital ledger that securely stores records across a network of computers in a way that is transparent, immutable, and resistant to tampering,” as Investopedia explains. It’s comprised of blocks of data that are linked together in a chronological chain.

How Blockchain Works

If the definition sounds a bit abstract, imagine you and your team are working on a shared Google Doc. In this setup:

• Everyone has the same copy.
• When someone makes a change to your Doc, that change appears in real time. Nobody has to wait for a new copy to be sent out or check their inboxes for a refreshed version being sent as an attachment.
• No one can erase old edits. They can only add new ones.
• If someone tries to “cheat” and change the page information and claim the Doc always said what it says now, every other copy of the Doc would prove them wrong.

This is, in essence, how blockchain works, too. It’s a shared, secure record that everyone in the network can see and verify, but nobody can secretly change.  

Key Benefits of Blockchain for Businesses

For businesses, blockchain can reduce risk, help cut costs, and improve transparency, all of which make a huge difference when managing finances, contracts, and supply chains.

Blockchain’s Link to Cryptocurrency in Finance

A lot of people think blockchain is cryptocurrency, but crypto is just one of the ways blockchain is used. Think of it this way:

• Blockchain is the technology, like the engine of a car.
• Cryptocurrency is just one application of that technology, like a car might use an electric engine instead of gas.

How Blockchain is Used Today

Blockchain technology is used in a wide variety of applications today, with even more developments on the horizon.

Cryptocurrency

Bitcoin, Ethereum, and other cryptocurrencies use blockchain to make sure that every transaction is public, permanent, and tamper-proof. These crypto payment solutions are like having a global accounting book that tracks every digital dollar without needing a bank to approve each transfer.

Finance and Payments

There are many financial blockchain applications. For instance, major banks use blockchain to streamline cross-border payments to reduce transaction costs and processing times.

Supply Chain Tracking

Blockchain is used to track food and goods from source to store. For instance, IBM developed Food Trust, a platform to help create transparent food supply chains. The platform has reduced recall times by up to 80 percent and saves millions of dollars annually, IEEE reports. Walmart also uses blockchain. After implementation, the store reported a 50 percent reduction in the time needed to trace the origin of foods.

Smart Contracts

Instead of relying on middlemen, many businesses use blockchain-based contracts that automatically execute when certain conditions are met. Known as “smart contracts,” they cut out delays and reduce fraud.

Healthcare

Hospitals are testing blockchain to create tamper-proof medical records. It helps ensure patient data remains secure and accessible to authorized professionals only.

Voting and Identity Verification

Some governments and private companies are exploring blockchain for secure digital identity verification and fraud-proof elections.

The Basics of Invoice Factoring Explained

The history of invoice factoring can be traced all the way back to 1550 BCE when the Phoenicians began trading on credit. While it has changed dramatically over the years, it remains a trusted business funding solution that’s used across the globe.

Factoring Defined

The word “factor” comes from the word “done” or “made” in Latin. Ergo, a factor is an entity that facilitates business activities, usually by providing resources.

In modern times, we refer to this process as “invoice factoring.”  A factor, also referred to as a “factoring company” provides resources (funding) to businesses by purchasing their receivables or unpaid invoices.

How Factoring Works

The factoring process is straightforward, but each factor might have slight nuances to how they work. Here’s how it typically goes for Viva Capital clients:

• You receive an order from your customer and connect with Viva.
• Viva checks into your customer to ensure they’re likely to pay their invoice in full and on time.
• You perform work or deliver goods to your customer.
• You sell your unpaid invoice to Viva and receive most of the invoice’s value within 24 hours.
• You continue working and taking new orders while Viva handles the collections process for you. You can check the status anytime you like through the online portal.
• Once your customer pays, you receive the remaining balance, minus a small fee for the factoring service.

Key Benefits of Factoring for Businesses

Factoring is unique because your business doesn’t accrue debt. The balance is cleared when your customer pays their invoice. Because approval is based on the creditworthiness of your customers, it’s much more accessible than other funding solutions like loans or lines of credit. Even new businesses and those without strong credit can qualify. Plus, approval and payments come through quickly, so you can focus on growing your business.

How Factoring is Used Today

People often think factoring is only used by businesses in distress or those experiencing financial troubles. While it is a good fit for these situations due to the easy approval process and fast funding, many healthy, stable, and profitable businesses across a multitude of industries use it, too.

For instance, a trucking company might leverage factoring to get paid for a load right away, so it can accept another and avoid downtime. A manufacturing company might use factoring to retool machines so it can accept a new client, facilitating growth. It’s also common for staffing firms and used to shorten the time it takes to get paid, allowing the business to cover payroll and more even though the client won’t pay for weeks or months.

The Convergence of Blockchain and Invoice Factoring

Blockchain is already making an impact in invoice factoring, even though the industry is still in the early stages of adopting it. The greatest opportunities come from increasing transparency, reducing fraud, automating transactions, and improving speed. Let’s take a look at these innovations in invoice factoring.

Faster Verification

Invoice fraud can sometimes be a problem in factoring. Businesses might submit fake invoices, duplicate invoices, or invoices for work that wasn’t finished. Because of this, factoring companies spend time and money verifying invoices and checking records.

How Secure Invoicing in Blockchain Works

• Every invoice can be recorded on a blockchain ledger, creating a permanent, unchangeable record.
• If a company tries to factor the same invoice with multiple providers, the duplication is instantly flagged.
• Buyers, suppliers, and factoring companies can all see the invoice history in real time, reducing disputes.

Automated Invoice Payments Through Smart Contracts

Even though factoring companies work much faster than other funding providers, payment processing can still seem slow. Traditional contracts require banks, lawyers, and third-party verifications before funds are released. Smart contracts in finance replace this.

How Smart Contracts Work in Factoring

• A business submits an invoice.
• The factoring company verifies the invoice on blockchain.
• Once verified, a smart contract triggers automatic payment.
• There is no waiting for manual approvals, paperwork, or third-party delays.

Faster, Cheaper Cross-Border Factoring

International factoring can sometimes be slow and more costly because it involves:

• Currency exchange rates.
• International wire transfers.
• Banking fees.
• Delays due to banking regulations.

How Blockchain Improves Cross-Border Factoring

• Businesses can receive stablecoin payments, such as USDC or XRP, instead of dealing with bank transfers.
• Payments are instant, cutting out waiting periods of three or more days.
• There are no hidden banking fees or exchange rate losses.

Turning Invoices into Digital Assets for Crowdfunding

One of the more innovative uses of blockchain in factoring is tokenization, or turning invoices into digital assets that can be bought and sold on a marketplace. Instead of relying on a single factoring company, businesses could sell invoices to a pool of investors, opening up funding options.

How the Digital Asset Factoring Process Works

• A business tokenizes its invoices, creating a digital representation of each invoice on blockchain.
• Investors can buy fractions of these invoices, funding the business directly.
• When the invoice is paid, investors receive their share of the repayment.

Increased Liquidity for Factoring Companies

Factoring companies need cash on hand to buy invoices. Some of them rely on bank loans or credit lines to fund their operations. Blockchain provides an alternative by allowing crypto-backed liquidity pools, where investors fund invoices using decentralized finance (DeFi) platforms.

How Factoring Companies Gain Liquidity Through Blockchain

• Factoring companies access crypto liquidity pools instead of traditional bank credit.
• They use these funds to buy invoices instantly.
• Payments are made in fiat currency, such as USD or EUR, or stablecoins, depending on the platform.

Why the Factoring Industry is Taking a Pragmatic Approach to Blockchain Adoption

Factoring companies aren’t rushing to adopt blockchain overnight, and that’s not necessarily a bad thing. While blockchain in finance brings clear advantages, the industry must navigate practical challenges, regulatory uncertainty, and the realities of how businesses operate. Let’s take a closer look at the mechanisms behind this.

Businesses Still Rely on the Traditional Banking Industry

Most factoring clients are small and mid-sized businesses that still operate on traditional baking systems. They send invoices through programs like QuickBooks, receive payments via automated clearing house (ACH) or wire transfer. They also don’t use crypto for business transactions or work with banks that don’t support fintech blockchain solutions.

Rather than jumping into blockchain technology trends, decentralized finance (DeFi) trends, or digital currency invoice factoring prematurely, many factors are waiting for banking integrations to catch up. A cautious approach ensures they don’t disrupt their clients’ operations while still exploring blockchain potential.

Regulatory Uncertainty and Compliance Risks Require Consideration

Factoring companies operate in a heavily regulated financial environment, where compliance with banking laws, anti-money laundering (AML) rules, and accounting standards is critical. Meanwhile, blockchain regulations are still evolving.

Instead of diving into an uncertain regulatory landscape, factoring companies are monitoring developments and ensuring compliance before making changes. This protects both their business and their clients from potential legal headaches.

Blockchain Doesn’t Solve Every Problem

Blockchain is great for transparency and security, but it doesn’t automatically address every concern with factoring. Some challenges, such as credit risk assessment and collections, still require human decision-making and industry expertise.

Instead of adopting blockchain just because it’s trendy, factoring companies are focusing on practical solutions that evaluate technology based on benefits, not just hype.

There Are Implementation Costs and Technical Barriers

Blockchain technology isn’t something you can just plug in overnight. It requires infrastructure, training, and integration with existing systems. Waiting until blockchain technology becomes easier and more cost-effective to implement is a strategic move.

Market Demand Isn’t There Yet

At the end of the day, adoption is driven by demand. Right now, most businesses aren’t looking for blockchain-based solutions. So, rather than investing in technology that clients aren’t asking for, factoring companies are prioritizing the needs of their customers by focusing on fast funding, strong customer service, and flexible terms first.

Work with a Reliable Factoring Partner

As you can see, blockchain has a lot of potential to transform the factoring industry. However, it, and the financial systems businesses leverage, need more time to mature before it can truly take off. With more than two decades in the industry, Viva Capital prides itself on providing fast and reliable funding. We also adopt new invoice factoring technology when the timing is right. For instance, our clients have access to an online portal 24/7 that makes it easy to stay informed, and our streamlined processes allow you to receive funding on the very same day you submit your invoice, well above the industry standard of three to five days. We also maximize the technology our clients already leverage, whether that’s more traditional invoicing programs or blockchain-driven systems like SPS Commerce. If you’re ready to experience the Viva difference, request a complimentary rate quote.