How Smart Contract Tech Moves To Lower Freight Factoring Costs

When it comes to B2B payments’ late payment problem, the root of the matter can often be traced to a lack of negotiating power between small suppliers and large corporate buyers.

With so many carriers in the ground freight and logistics market operating as small businesses, or even as single-person enterprises, it’s no surprise that late payments can place a major cash-flow constraint on truckers. Bibby Financial Services‘ Global Business Monitor 2017 report found that small businesses in the sector often wait at least 45 days to get paid, with 41 percent citing invoice collection as their biggest challenge.

Amid these cash-flow pressures, separate data from Broughton Capital found that more trucking companies in the U.S. went bust in the first half of 2019 than in the entirety of 2018.

Invoice factoring is a common strategy for carriers in a market operating with tight margins and delayed invoice payments. However, frustrations with the financing tool can weigh heavily, as truckers are forced to finance their unpaid invoices, thus settling to less than what they should be paid from their shipping and logistics clients.

According to logistics platform dexFreight‘s President and Chief Executive Officer Jim Handoush in a recent PYMNTS interview, the struggle for small and large companies in B2B relationships to obtain a level playing field is “a problem all throughout the world, in terms of small businesses not being able to stay as competitive as larger entities.”

That’s especially true, he noted, as larger corporates have fewer barriers to access affordable financing. With margins tight and company closures an imminent threat, factoring is often a crucial avenue for small trucking firms to remain afloat.

“Payment incentives are misaligned between stakeholders,” he said of the industry’s cash-flow challenge. “Shippers want to hold onto their cash flow as [long] as possible, but carriers need to be paid quickly. Factoring is a solution to this misalignment.”

Despite the importance of factoring in the market, Handoush emphasized that the industry is in need of a more affordable way for truckers to address that misalignment.

Blockchain Mitigates Risk

With a new factoring solution having completed its pilot testing, dexFreight is turning to blockchain and smart contract technology in an effort to lower the cost of invoice financing. According to Handoush, it is blockchain’s ability to provide security and assurance to trading partners, brokers and financiers that allows for more favorable factoring rates for truckers.

Using blockchain, invoices can be tokenized and turned into smart contracts, meaning information cannot be duplicated or altered. This mitigates a range of risks, both for trading partners and their financiers. For instance, it mitigates the risk of duplicate invoice payments — a problem for manual invoice processing and accounts payable practices across a range of industries, Handoush said.

“From a risk assessment standpoint, it gives [the invoices] more credibility, and [financiers] are able to evaluate [them] with much more confidence,” he explained.

Less risk means lower rates. According to dexFreight, blockchain and invoice tokenization has led to factoring rates under 1 percent.

There are other opportunities for blockchain technology to address friction in the logistics and freight market, he noted.

For instance, similar smart contract technology has the potential to mitigate risk, and enhance the insurance policy underwriting process, with blockchain able to present secure, verified data pertaining to company reputation, shipment milestones and other key performance indicators. Furthermore, dexFreight is exploring blockchain to establish a data marketplace, allowing shippers, brokers and trucking companies to “lease” data to each other without compromising its integrity or security, opening up avenues for these industry players to monetize the data they already have, Handoush explained.

The company isn’t the first to explore the use of blockchain and smart contracts for factoring purposes. Indeed, blockchain continues to be a popular target for innovators across a range of financing and payment use cases. However, it’s no guarantee that the technology will become the industry staple that many proponents of the tool expect it to be.

What’s important about blockchain in this use case, noted Handoush, is not the nitty-gritty of how it works. Businesses simply want to know that it will provide fast, secure and affordable invoice financing.

“It’s like you and I going on an airplane. We don’t need to understand all of the aerodynamics and components of the airlines, but we trust the process to get from A to B,” he said. “It’s no different here. … As long as more of their money hits their pocket at a lower rate than they’ve seen before, they don’t need to understand the actual mechanics of the back end, of what’s actually occurring.”