InvoiceMate

How “KYI” Facilitates Invoice Financing

How KYI Facilitates Invoice Financing

KYI (Know Your Invoice) is a unique concept by InvoiceMate to revolutionize the invoice financing industry. In the following lines, we will take look at how this is going to happen.

First, we need to lo take a look at how business financing works.

Business Financing

In business financing, a business borrows money or equivalent to meet its financial requirement. This borrowing is done through some financial institutions. To extend any type of financing facility to a customer, the financing institution needs to secure its investment in one way or another. Invoice financing is no exception to that. Business financing is always issued against some kind of pledge or collateral. The most common shape of the collateral can be some tangible fixed asset like land, building, machinery, stock, etc. or it can be collateral like a bond or a certificate.

Invoice Financing

In invoice financing, the receivable invoice itself acts as collateral. An invoice is drawn by a seller upon a buyer to record a transaction of goods and/or services delivered by the former to the latter. A receivable invoice is an invoice with payment becoming receivable on some future date from the delivery. The seller goes to the financing institution with receivable invoices. The lender after verifying these invoices issues a portion of the amount receivable as a loan (like overdraft) to the seller. The seller utilizes that money in the business. Once the invoices become due, the seller collects the payment and pays back the loan to the financier along with the agreed-upon service charges.

In Invoice Financing, it is the invoice that acts as collateral for financing, unlike other types of financing where a tangible capital asset involves as collateral. So for invoice financing, the lending institutions need to ensure the integrity of the invoice. To accept an invoice to be valid for financing the lender has to ensure the following.

  • Who is the seller?
  • Who is the buyer?
  • Are the information provided in the invoice correct? (Amount, Quantity, Payment Terms)

For the financial sector, KYC is the standard practice to learn about their clients/customers. Most of the industry is bound to comply with the KYC practices by law.

KYC (Know Your Client)

KYC is a compliance practice adopted by the financial sector. In its simplest definition, KYC is the process of knowing all the required information about your client from the financial point of view. It includes; knowing customer identity, their investments, and financial profile. This is necessary not only to control financial frauds but also to ensure that the proceeds of financial crimes and ill-gotten money cannot get into the financial system. It is also necessary to prevent money laundering through legal channels. 

For financing companies, KYC is important as by knowing their customer they can minimize risks to protect their investment in the shape of business financing. Risk profiling is an essential practice in the financing industry.

By adhering to KYC practices financial institutions can save a lot in monetary terms as well as legal complications. When it comes to invoice financing, KYC gets deficient. With KYC they can get information about the customer, their financial position, and funding sources but KYC cannot provide information about the integrity of the transactions and the invoices furnished by them for financing. This is why most financial institutions avoid invoice financing or extend this facility to their reputable and trusted clients. This way, the decision is not made on the merit of the collateral but an overall relationship with the client. Whenever and wherever the financing institution is unsure about the customer, it will not entertain the invoice financing request. As invoice financing is a short-term credit facility so financial institutions don’t opt for the due diligence process for invoices.  As discussed earlier the lender need to know answers to a few questions before financing an invoice. These are:

  • Who is the seller?
  • Who is the buyer?
  • Has the transaction reflected in the invoice taken place?
  • Is the payment of the invoice still due as stated in the invoice?
  • Is the amount due the same as that stated on the invoice?
  • Isn’t the invoice already financed by some other financial institution?

To get the answers to these questions, the financial institution has to do due diligence. The process involves multiple parties and records so it requires a lot of time, money, and resources.  As invoice financing is a short-term credit facility so financial institutions don’t opt for such a tedious due diligence process. That is why out of the $7833 billion global financing market, invoice financing’s share is S4 billion only. This constitutes only a 0.051% share of the overall market.

If there is a mechanism that can answer all these questions quickly and cost-effectively, invoice financing can become a viable medium of loans for financing institutions.

This is where the missing piece of the solution comes into the picture and that is KYI.

KYI (Know Your Invoice)

“Know Your Invoice” is the revolutionary service by InvoiceMate, the world’s first blockchain-powered invoice management system. InvoiceMate records every step of the whole journey of invoice processing, from invoice creation to payment and financing on an immutable decentralized and distributed blockchain network. This way the integrity of the invoice and the related documents is always verifiable by all the concerned parties. The fraud-resilient mechanism of the blockchain ensures the sanctity of the invoice across the whole process. With KYI services banks and other financing institutions can always verify the credentials of the invoice along with those of the parties involved in the transaction. The KYI service is economical and offered in real-time. It can provide the compliance needed by any financial institution for invoice financing. 

 

Benefits of KYI For Banks/Financing Institutions

Let’s take a look at the categorized benefits of KYI for Banks/Financing Institutions.

  • Efficient compliance & due diligence by gaining deep insights into the entire journey of invoice.
  • Fraud resilient, speedier invoice financing cycle reduces operational cost and increases invoice financing clients.
  • AI-powered algorithms aiding in risk profiling of invoice financing applicants. 

KYI is not only helpful for the lenders but it is equally beneficial for the borrowers themselves and all the concerned parties of the business including the parties in the transaction, investors, and independent auditors.

More about KYI can be found here.

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