Business financing has always been a thorny issue for many small and medium-sized businesses (SMBs), and is often cited as one of the reasons behind the morbid failure rates for new businesses. One report found that about 29 percent of failed businesses identified the lack of working capital as a major reason for failure, second only to the lack of market demand for their products or services.
These failures are mostly due to the many barriers within the traditional finance industry, including outdated credit rating protocols. As a result, banks and other traditional lending institutions often have slow and rigid lending processes, thus denying SMBs timely access to working capital and severely affecting business growth.
This is where the blockchain, the incorruptible, decentralized ledger, can help create new opportunities for funding while helping existing institutions make better lending decisions for SMBs, thus improving access to much-needed funding.
Here are a few specific ways the blockchain can be used to bolster funding for SMBs.
1. P2P lending
When the idea of peer-to-peer lending was first conceived, it was a novel idea that helped provide funds to individuals and businesses quickly and at reduced rates.
And as blockchain technologies continue to mature, blockchain-powered P2P lending platforms are promising to reduce transaction times and fees even further. By using smart contracts, blockchain-powered P2P platforms such as Celsius are able to verify users and validate transactions almost instantaneously, thus accelerating the process and cutting down on costs for borrowers.
The blossoming crypto market is also helping fan the flames of disruption for P2P business lending. Earlier this month, Ripple, the company behind the third-largest cryptocurrency, XRP, announced plans to push the use of XRP into other industry segments outside of P2P payments and banking, including the P2P lending industry.
This will open up the P2P lending platform to a global audience, thus improving reach and accessibility to SMBs around the world.
2. Using blockchain and big data to improve existing systems
In addition to P2P lending, the blockchain is also being used by alternative and traditional lending institutions to improve big data analytics, a standard protocol used by lenders to assess the creditworthiness of borrowers.
Wish Finance, a blockchain-based lending platform for SMBs, is using the blockchain to help improve traditional risk scoring systems while providing a simple platform for repayments. The startup integrates an SMB’s POS infrastructure with their blockchain platform, enabling the lender to offer business loans and cash advances based on actual cash flow instead of assets.
Additionally, platforms such as Bloom and Pave are helping disrupt the credit rating space via the blockchain. These platforms are using the blockchain to manage and rate mainstream and alternative data sources for more accurate credit scores, giving traditional credit scoring systems such as FICO a run for their money.
3. ICOs and SMB funding
ICOs, short for Initial Coin Offerings, have been among the most popular implementations of the blockchain, rivalled only by cryptocurrencies. And for the longest time, they’ve been associated with trendy startups in the tech industry, where they’ve helped raise billions of dollars in capital, sometimes without anything but a flashy PR campaign.
But as investors become wiser and as trust becomes a permanent feature of the blockchain, there’s a growing opportunity for SMBs with solid business models to cash in.
Decentralized ICOs, or dICOs, are slowly becoming a safer, faster, and scalable alternative to traditional ICOs, and will present opportunities for SMBs to raise funds without the scammy outlook that is often associated with traditional ICOs. There’ve been two dICOs held so far, with the latest held by Utrum, a crypto startup that’s looking to create a community-based platform for reviewing blockchain lending and other crypto projects.
Plus, as the wave of regulation continues to inspire growth within the ICO world, the entry threshold – often too high for small businesses – will lower just enough for SMBs to come on board.
Evidently, the blockchain has a huge potential to disrupt the lending industry for SMBs. However, like many other tech advance of this age, we must be careful with implementation, especially when it comes to handling the backend. In one Gartner report that was broken down by analysts from Appoptics, most businesses, developers, and vendors were found to struggle with tech implementation at the application level, thus obscuring the benefits for customers.
Consequently, SMBs should always go with blockchain-powered platforms with the right technical capabilities to prevent problems down the line. Platforms such as Dispatch and Securitize are helping businesses avoid the technical and regulatory bottlenecks when launching ICOs, with the likes of Eventum enabling business identify crypto scams on the blockchain when looking for funding.
Because the blockchain is still evolving, going with any blockchain-based lending platform just because they’re offering cheap loans would be a risky undertaking – far worse than going with your traditional banking partner.