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Self liquidating arbitrage

self liquidating arbitrage-90

Over in B2B, the niche that we call Invoice Finance (but which is also known as Approved Payables Finance, Receivables Finance, Supply Chain Finance and occasionally Reverse Factoring) has proven the proposition to both Lender (short dated, self liquidating assets) and Borrower (low APR %) and yet despite about 15 years, none of these have reached mass scale yet.Today’s research note looks at the thesis that Blockchain technology could be the breakthrough that makes Approved Payables Finance go mainstream.

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We recently described how an immutable shared database (aka Blockchain) could create a better supply chain by cracking the provenance issue.Invoice Finance is a generic term that describes it from the point of view of the buyer, seller or lender.Generically it is cash flow secured lending as opposed to collateral secured lending and it works in B2B which uses invoices (vs B2C which uses cash or cards).This is where the integration of the physical and financial supply chain via a blockchain could be the game changer.The vision of Digital Trade Finance Banks make a lot of money on Trade Finance (as I recall from years of selling Trade Finance workflow software to big banks).Lenders get what is highly prized in an age of ZIRP and NIRP, which is high credit quality, short dated, self liquidating assets. Anybody operating in this market confirms that if they offer $10m of these assets, the Lender asks for $100m and if they offer $100m of these assets, the Lender asks for $1 billion.

Lenders look at the arbitrage with Short Term Treasury Bonds and Corporate Bonds and back up the truck for as much as they can possibly get. What is holding Approved Payables Finance back from mass scale?

They are tokenizing invoices so that they can be tracked and approved on a blockchain. The key is that both the physical and the financial supply chain can be tracked on the same networks.

This is a critical innovation because it prevents the invoice from being refinanced (aka “double-spent” in Blockchain lingo). Buyers can approve invoices on the Fluent Network once they receive the physical goods.

This is where the arrival of Internet Of Things and Blockchain could be the game-changer.

Cracking the provenance issue and tracking shipments Flexport is a Silicon Valley venture that raised $20m Series A in August 2015 that aims to bring freight forwarding into the Internet age (out of the Victorian age of analog Trade Finance).

This is where the physical supply chain can now intersects with the financial supply chain.