The Invoice

Money is anything that enables economic relationships. It might surprise you to think of an invoice as a form of money, but actually almost all our money represents a debt or obligation between two parties. At its core, credit creates a possibility for value to be exchanged now for future, often greater value to account for the passage of time. Credit allows us to shift time and to delay settlement to align with the natural distance between the creation of value in the supply chain and a purchase by an end consumer. Credit creation also implies mutual benefit, for our reciprocal exchanges should enable us to serve all our needs by focusing on a particular business niche and trading to fulfill our other needs.

We are often alienated from this core truth given the abstract and fungible nature of national currency that mediates most transactions. Money tends to hide the embedded relationships. When our fiat money is created, an obligation is created between the borrower and the bank to pay back U.S. dollars at interest. Our credit-worthiness is based on the likelihood that we are able to acquire those dollars in the open market. But does it have to be this way?

Consider that when a supplier sends goods or provides services with commercial terms for settlement in 30, 60 or 90 days, the buyer enters into an agreement backed by their ability and demand for them to serve the market: the invoice. Unlike bank loans which represent a very transactional view of money constrained by the willingness of banks to guarantee our credit, the invoice is inherently relational and is as abundant as our desire to enter into promises with others, often with no interest involved. The supplier and buyer are participants in a web of trust that is at all times expanding and contracting and dependent on many parties outside a single transaction. They must gain trust in their suppliers’ suppliers and their customers’ customers over time in their dealings to determine the amount of credit they can extend, for they are financing their customers. Let’s say it again, because it’s important: with the invoice, suppliers finance their customers in a manner that exposes a fundamental kind of trust that exists between them, a trust in their customers’ very capacity to function as businesses.

Of course we expect that all obligations must be balanced eventually, but they do not necessarily need to be settled in money. We say that using money for settlement is using liquidity to balance the state of obligations in the network. Traditionally, fiat currency is used as a source of liquidity and injected into the systems to clear chains of obligations. For example, a raw materials company issues supplies on credit to the manufacturer, the manufacturer transforms them into  finished goods, and then a wholesaler or distributor gives the goods on credit to a retailer. The aggregate total of time and $ value that each party in the supply chain allocates to their customer in the chain represents the sum total of credit extension in the supply chain for that item. When the end customer pays in cash, the retailer can pay the wholesaler who can pay the manufacturer and so on down to the raw material supplier, clearing the obligations like a row of dominoes. 

But what if there was a way that we could clear some of those obligations without needing traditional scarce bank money? 

To illustrate this let’s use an example of 3 friends going out on the town for the night. In this instance, money is being used for each transaction, but the example can still illustrate the core concept. Alice, Bob and Carol start the night with dinner at their local restaurant. The bill comes to $150 and Alice offers to put the amount on her credit card to expedite the process. Bob paid for the Uber to the restaurant which was $30 and another $20 to bring the group to a bar after. The group gets some drinks and Carol is willing to put them on her tab, totalling $100. The next day, the group decides to settle up. With a night total of $300, Carol has covered her part, Alice has paid $50 extra and Bob $50 too little. The temporary extension of credit can be covered with a single payment of $50 from Bob to Alice. Of course, it’s straightforward to do this kind of netting between friends, and there are apps to make it easy, like Splitwise.

Now, consider a business context. If one had a view of all of the obligations of invoices in a network, one could offset certain cycles of obligations without liquidity. Business A owes Business B $50,000. Business B owes the same amount to Business C and Business C owes A an amount of $75,000. Without knowledge of this connection, each would need cash on hand to settle up, but instead we can simply offset the invoices and see that a single payment of $25,000 from Business C to A is all that is required to settle up. 

This is what CoFi is enabling at a high level. As credit crunches disproportionately affect SMEs, the ability to clear debts without scarce bank debt money becomes increasingly necessary. Not only can businesses conserve cash on hand, but they can also reduce their costs servicing compound interest that comes with bank-issued credit lines. Furthermore, debts cleared in the system reduce net system debt and reduce the chances that a lack of liquidity can cause cascading defaults, exacerbating credit contractions. 

In sum, it is the promise itself that creates much of the money in our economies, whether fiat money or an invoice. Promises eventually have to be settled to change the state of debts in a network. Anything that facilitates economic exchange is money, even if no liquidity is used and debts are simply offset.