View from the Frontier: 5 reasons to start using the world’s first smart invoice

July 16, 2019 Mads Stolberg-Larsen

 

At Tradeshift Frontiers we’ve processed the world’s first “smart invoice” on a public blockchain. We believe smart invoices will have a profound impact on global trade, providing companies with new opportunities to transform their business and unlock value. 

 

Smart invoices are just like traditional invoices; they define the rules of engagement between two parties. They include information like:

  • Who’s the beneficiary?​
  • What’s the amount owed?
  • What are the payment terms?
  • What is the due date?
  • How is the agreement settled?

But crucially, smart invoices execute the contractual terms automatically without relying on manual data entry and management of a traditional invoice. 

 

Before we look at why smart invoices are transformational, let us briefly explain how we created a smart invoice.

 

How we created smart invoices

 

The key to creating smart invoices is to tokenize the invoice asset. A token is a digital representation of an asset. It could be a dollar value represented in x number of tokens or a long payment term represented in a time token. 

A token, in the case of a smart invoice, gives the holder the right of ownership of the future cash flow that the invoice will create. On the blockchain, this token (or ownership of value) moves between parties until the contract is fully executed. At that point, the holder of the token cashes it out for its monetary value.

The workflow of our smart invoice follows four steps :

  1. The buyer commits to paying the invoice. 
  2. The due date triggers a settlement. 
  3. Payment is automatically made to the smart invoice. 
  4. Whoever holds the “invoice tokens” redeems the money from the smart invoice.

See this blog post if you want to know more about our thinking around smart invoices 

 

Here’s an illustration of the workflow:

 

 
 
 
 
 
 
 
 
 

Transforming business with smart invoices

 

Automation and efficiency are the obvious reasons to move over to smart invoices. But there are other compelling reasons to consider.

 

Here are five reasons to use a smart invoice:

 

Smart invoices are as good as money

In today’s world, there’s a disconnect between invoice and settlement. And that divide shows up in the complexity of financial products like factoring, which require numerous parties to mitigate the risk of non-payment.

 

Smart invoices change the game by intimately linking the invoice and settlement by making it execute the terms instantaneously. This automation removes a ton of risk and enables financing companies to explore a range of new financial opportunities previously locked by manual tasks. 

 

A better finance ecosystem

When you tokenize receivables through smart invoices, you can use those tokens to extend asset-backed financing to your entire supply chain. This will unlock cheaper capital for small and medium-sized sellers that traditionally can’t access finance. The Tradeshift network alone has over $1 trillion in potential new financeable volume between tier one and two suppliers. 

 

Cross-border payment efficiency and cost savings

The vast majority of cross-border payments stem from companies doing business in multiple currencies. Smart invoices allow settlements and value transfers on public (or private) blockchains, which saves money and reduces risk. 

 

Eliminate double-dipping in trade finance 

Double-dipping in trade finance happens when a supplier finances the same invoice multiple times. This fraudulent behaviour hit the headlines a few years back. It’s a costly issue for the entire industry and one that smart invoices can solve by tying the buyer’s payment into a single tradable token that can’t be refinanced. 

 

Real-time auditing based on real-time market prices

Invoice tokens are always a product of the company’s balance sheet. As a result, the market price of the tokens is a measurement of the company’s internal value and current state. That lets companies use smart invoices as a real-time auditing tool. Auditors can then use the token prices as the source of truth to update continuously the value of a company’s balance sheet.

 

The future of trade finance

 

Smart invoices and the tokenization of assets can increase the flow of cash through the entire supply chain. It will also increase the interaction between trading companies and supply chain ecosystem partners, increasing the number of transactions and creating more value out of all the relationships.

 

Supply chain ecosystems are valuable because of the relationships between all products, not just the relationships between the largest. Smart invoices and the tokenization of digital assets can bring this value to the surface and transform the way we think about trade finance.

 

Visit the future of supply chain content stream to find out more about Tradeshift Frontiers and how they’re working to transform global trade.

 

 

 

About the Author

Mads Stolberg-Larsen

Mads is an economist specialized in business models around blockchain. When working for Deloitte Denmark he delivered their first blockchain project. He's excited about the decentralized version of the ongoing digital revolution.

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