Request Network Connector – Invoice Factoring
Alexandru Stoicescu
Apr 11, 2022
3 min.
TL;DR
Web3 makes invoice factoring open, fluid and verifiable
Tokenization of invoices
Upgrade of Request Network to allow for NFT invoicing
Grants of $600k for builders
If ‘Web3 Invoicing’ was the name of a TV show, season 1 would be about ‘Automating payment reconciliation on a blockchain’
Season 2 and beyond would be about ‘Extending utility of web3 invoicing’ , with the theme being around use cases other than just paying and being paid in crypto.
And right now the auditions have opened for the future protagonists of web3 invoice factoring, which will unlock entirely new possibilities for on-chain commerce.
As part of Request Network Connector, an initiative to connect the siloed financial system together, we are excited to unveil the first campaign on Invoice Factoring.
To help you better understand why we’re tackling invoice factoring in web3 and provide you a guide on how the campaign will work, this article will cover;
What is invoice factoring, and its application in web3
Using NFTs for invoicing
Request Network pioneering web3 invoice factoring
The Case for Invoice Factoring in Web3
Invoice factoring is a financing process whereby a business sells its unpaid invoices to a third party company to get early access to payments and improve their cash flow. In traditional finance, the global factoring services market has been evaluated at $3,394 billion in 2021 and is expected to expand at a compound annual growth rate (CAGR) of 8.8% from 2022 to 2030.
Traditionally, it takes weeks and reams of paperwork for the third party company, usually a bank, to carry out the due diligence and determine the creditworthiness of a company. The process is labor intensive and would be accessible to companies with large volumes of invoices. While invoice factoring may still be easier to secure financing instead of a bank loan, the costs associated with factoring would dishearten smaller actors, which typically range from 0.5% to 5%.
Moreover the act of selling one’s invoices to a factoring company transfers legal ownership of the liability. Consequently, subsequent collection of debt is managed by the factoring company which may affect relationships with clients.
Within the legacy systems, credit scoring remains siloed and deeply centralized within a core set of players, which increases switching costs for financing.
Now imagine factoring without the factoring companies, and instead using smart contracts.
With a smart contract, a piece of code could automatically perform the creditworthiness based on payment history of invoices on the blockchain and through an aggregation mechanism, assign a credit score to the payer, essentially creating an on-chain reputation.
The absence of an intermediary would eliminate the manual due diligence process and open access to near-instantaneous financing for anyone having an invoice on-chain. The on-chain credit reputation would make borrowing against collateralized invoices more fluid , and open access for financing through any DeFi protocol.
One of the web3 primitives which brings about this reality is through tokenization of the invoice , or can be referred to as an invoice NFT.
Using NFTs for invoicing
Under the ERC-721 standard, an invoice can be programmed to automatically transfer ownership from the issuer to the finance provider or factoring company.
This new layer of programmability attached to an on-chain invoice allows to make the invoice tradable , whereby a new owner can be assigned at every sale event.
What does this mean for invoice factoring?
An offchain paper/digital invoice can only contain details around names of parties, date, scope of services, amount, credit period. On the other hand, an NFT can be programmed to contain metadata pertaining to the payee and payer’s payment pattern , the invoice approval pattern , funding ratio and fetch the credit score for both parties.
When all of the above information can be collected, reported and presented on-chain , the intermediary under the traditional finance model is removed from the equation.
The NFT not only becomes the immutable source of truth or proof of credit relationship, but a verifiable credit score encourages good behavior from all participants.
Request Network Pioneering Web3 Invoice Factoring
As a payment requests protocol, today Request Network allows the creation and automatic detection of crypto payments on more than 15 blockchains. As of October 22, Request Finance powered by Request Network, has processed more than $254m in on-chain invoices.
To expand its utility for invoice factoring, the protocol is currently being upgraded to allow for NFT invoicing (official announcements will follow)
As part of this campaign announcement on Invoice Factoring, our aim is to support and collaborate with actors building solutions for web3 invoice factoring, ranging from liquidity providers, decentralized exchanges, credit scoring protocols.
Request Network Connector has put forth a budget of $600k to support builders building solutions to turn the current siloed antiquated industry into a new, decentralized, transparent and interoperable one.
All interested parties who seek to participate and be whitelisted in future invoice factoring releases are invited to reach out to us on Discord.
We’re just beginning to scratch the surface with what’s possible with NFT invoicing, but we cannot build it alone. Let’s make it happen together.
