top of page
  • Writer's pictureArka Roychowdhury

The Finance behind Invoice (Asset/Liability) Tokenization

Updated: Sep 24, 2023

Invoices are paid to the seller for the goods or services they delivered to the buyer. The payment terms are usually agreed upon by both parties before the transaction, and they can vary from immediate payment to several weeks or months. A delay in invoice payout can cause cash flow problems for small vendors, who may not have enough working capital to cover their expenses and invest in their business. To overcome this challenge, some vendors resort to invoice financing, which is a form of short-term borrowing where they sell their unpaid invoices to a third party at a discount. This way, they can receive cash upfront and improve their liquidity.

An invoice is a document that represents a formal request for payment from a vendor or supplier for goods or services provided to the customer/buyer.

It serves as a record of the transaction and is used to track accounts payable and accounts receivable. More formally, it is accounted as a current asset / accounts receivable in the vendor balance sheet, and current liabilities / accounts payable in the balance sheet of the customer.

Tokenization is the process of converting an asset or a right into a digital token that can be traded on a blockchain platform. By tokenizing their invoices, vendors can create new financing options for themselves and attract more investors who are looking for alternative assets. Tokenization can also increase the efficiency and transparency of the invoice financing market, as it can reduce intermediaries, lower costs, and enable real-time tracking of payments. Tokenization can thus help small vendors to overcome the challenges of delayed invoice payout and improve their cash flow management.

One way to tokenize this asset (from the point of view of the vendor/supplier) would be to create a digital twin in the DLT that will represent this invoice. This will not be a new financial instrument or a document, the Invoice will still be issued, verified, accounted for and kept in custody traditionally. The idea is that this token/ which will be a different form factor of an invoice will unlock working capital through access to innovative financial solutions including DeFi.

Now a little more about Receivable and cash conversion cycles

Invoices are paid depending on the payment terms between the buyer and seller, which may range from a few days to weeks. A delay in Invoice payout is a serious problem for cash strapped small vendors, who have to rely on Invoice financing as a consequence. A typical metric to measure the efficiency of collecting payment is Days of Sales Outstanding (DSO = (avg. account receivable/total revenue)*365). The smaller the DSO the better it is for the Vendor.

Tokenization can allow new age fintechs to create new financing options for these vendors and create an efficient market for investors too.


Recent Posts

See All

Before developing a GenAI Strategy

The advent of Artificial Intelligence (AI) marks a pivotal moment in history. BCG’s study revealed that consultants using AI completed 12.2% more tasks, 25.1% faster, and produced over 40% higher qual


bottom of page