The media's attention on large firms often overshadows the vital role that small and medium enterprises (SMEs) play in the economy. In fact, according to the United Nations, SMEs account for 90% of businesses, 70% of all jobs, and half of the world's GDP.
Despite their significant contributions, SMEs often face challenges when it comes to funding and growth. One major reason is that they often lack the collateral needed to access traditional forms of financing.
The unique challenges SMEs face
The pandemic put even more strain on SMEs as they dealt with lockdowns, supply chain disruptions, and a decrease in customer demand. This led to a shocking $3.4 trillion funding gap in unmet trade finance needs globally.
This funding gap creates a vicious cycle for SMEs. Without access to capital, they can't grow and create jobs. This lack of growth then makes it even harder for them to get financing.
When looking at MSMEs, which includes "micro," "small," and "medium" enterprises, the problem is even more pronounced. It's estimated that MSMEs have a $5 trillion funding gap in developing countries alone.
While the pandemic has subsided, the challenges facing SMEs have not. They continue to face an uphill battle when it comes to accessing the capital they need to grow and thrive.
This is where tokenized invoices can help. Tokenized invoices are digital representations of traditional invoices that are stored on a blockchain. This allows them to be traded and sold on a secondary market, which can provide much-needed capital for SMEs. It also creates a single source of truth for the invoice, which can help with fraud prevention, asset ownership verification, and automate administration.
The 5 benefits of tokenized invoices for SMEs
Tokenized invoices can provide many benefits for small and medium enterprises. Here are five key advantages.
1. Close the funding gap
Tokenized invoices can help close the $3.4 trillion funding gap that SMEs face by providing them with alternative financing options. When an invoice is tokenized, it can be sold on a secondary market to investors.
Traditional invoice factoring markets are not peer-to-peer, so they often take a large cut of the invoice value. Further, investors can be geographically restricted, which can limit the pool of potential investors.
Further, these markets don't tap into the trillion-dollar crypto market that's looking for new investment opportunities. Tokenized invoices offer a way to tap into this market and get the funding SMEs need to grow.
2. Increase transparency and trust
According to an MGI report, 59% of businesses experience significant customer friction due to billing disputes. Tokenized invoices can help reduce these disputes by creating a single source of truth for the invoice.
This is because all of the data related to the invoice — from the date it was issued to the amount owed — is stored on the blockchain. This immutable ledger creates a record that can't be tampered with, which gives both buyers and sellers more confidence in the invoice.
3. Enhance security
As legal professionals note, when a business accidentally pays a fraudulent invoice, their legal position is "murky" at best.
In one famous case, a group of bad actors simply emailed fake invoices to Facebook and Google. This worked to the tune of $100 million, before it was finally caught.
There are countless other cases where businesses have been defrauded by fake invoices. More recently, hackers have been using PayPal to impersonate suppliers and send fake invoices.
Tokenized invoices can help prevent these types of fraud by creating a single source of truth for the invoice. This immutable record can help businesses verify that an invoice is legitimate before they make a payment.
4. Streamline administration
The current process for managing invoices is inefficient and manual. Tokenized invoices can help streamline this process by creating a single source of truth for the invoice.
This would allow businesses to quickly and easily verify the status of an invoice, as well as track payments. It would also automate many of the manual tasks associated with invoices, such as matching invoices to payments.
5. Boost financial inclusion
SMEs often have trouble accessing traditional forms of financing, such as loans and lines of credit, due to their lack of collateral. This leaves them reliant on cash flow to fund their operations, which can be difficult during periods of slow growth.
Tokenized invoices can help boost financial inclusion by providing SMEs with alternative financing options. When an invoice is tokenized, it can be sold on a secondary market, which can provide much-needed capital for SMEs.
Tokenized invoices offer a number of benefits for SMEs, from closing the funding gap to enhancing security. They also have the potential to streamline administration and boost financial inclusion.