Why do you need to know about CDCs?

Updated: Nov 16, 2021

Hiring workers, getting clients, providing a good service, paying suppliers. Running a business is hard enough, but at least, once the business is done, we'll be paid and we'll be able to keep everything running, and with some luck earn something for ourselves.

For many companies big and small, this is far from being true since after having done the work, a new challenge emerges to know when they’ll be paid, or if they'll be paid at all.

And this uncertainty doesn’t affect just us, but also affect our suppliers, damaging our reputation.

There is a myriad of options to solve this, from keeping some cash for unforeseen events, to getting credit insurance or non-recursive factoring, but all have a pretty high cost, don't cover 100% of debts, and are not available for all.

The problem is especially acute in sectors with many intermediaries, as the client may pay but the funds get stuck in some of the steps in between.

For instance, in Freight Road Transport, it takes 85 days on average for the carrier to be paid. The problem is so big that it’s been limited to 60 days by law, with fines for the clients, and making both clients and intermediaries solidarily responsible for the payment to the effective carrier.

Then we have a situation that hurts both Carriers, that don’t know if they’re going to be paid but also hurts Shippers and intermediaries, that don’t know if they’re gonna have to pay fines or pay twice for the other’s failure to pay.

The solution for them are CDCs or Collateralized Debt Chains. A CDC consists in that a Client deposits a legally enforceable guarantee, such as a money deposit, a credit line, a commercial document... In favour of the CDCs entity.

This guarantee covers the cost of a service, and suppliers can check its existence before accepting doing a service. At the stipulated time of payment, the CDCs entity allows the client to pay directly, leaving the guarantee intact, or use the guarantee itself to make the payment.

This system allows suppliers to outsource the service without creating a guarantee themselves, but be covered by the client's guarantee, so a single guarantee can give security to several companies participating in the outsourcing chain.

Traxain is so far the only operative CDC entity in Spain, and have built an API that can be integrated into multiple systems, and it includes a conflict resolution system without courts or arbitrage through verifiers designed by the parties.