Applying Blockchain to Solve the Funding Problem for SMEs

Applying Blockchain to Solve the Funding Problem for SMEs

Small and medium-sized enterprises, otherwise known as SMEs, are the lifeblood of economies all over the world. But ensuring that they reach their full potential is an issue that has remained without a viable solution for decades. Could blockchain be the answer?

– Guest article by Peter Edgar, CEO Investx

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Solving the Problem of Working Capital for SMEs

Banks are inherently risk averse, so their tolerance for SME lending is relatively low. Last year’s report from the World Bank estimates that 70 percent of small, medium, and micro-enterprises are unable to access the credit they need.

Inability to bring in capital continues to cause enormous harm to small businesses–stifling growth and causing cashflow difficulties. Businesses identify the lack of working capital as a major reason for corporate failure, second only to the lack of market demand for their products or services.

Even if small businesses can secure loans, they’re often left with uncompetitive and unfavorable interest rates that can be crippling. Just when small businesses are supposed to be rapidly growing, they’re often tied up servicing their debt.

Crowdfunding has emerged to fill the gap in the market, but it comes with a number of disadvantages. Most existing equity crowdfunding platforms focus solely on startups or early stage businesses in specific sectors (in particular technology and brewing), meaning that this new funding route is closed to most SMEs from other sectors. The majority of platforms also limit investor reach, resulting in incomplete raises and wasted potential.

Both equity crowdfunding and peer-to-peer lending, at least theoretically, have the most potential to solve the problems of SME financing–but the current system doesn’t work as efficiently as it could. That’s where blockchain comes in.

Raising capital

Blockchain Helping SMEs to Grow and Thrive

Social lending has been a popular means of generating capital for hundreds of years (people who have money giving it to people who need money), but it has fallen out of fashion alongside the rise of modern financial institutions. P2P is currently seen as something niche–something created for those businesses reluctant to trust the banks or incapable of securing funds from elsewhere.

With the advent of blockchain, P2P is likely to finally find its feet and move into the mainstream. The decentralized nature of blockchain circumvents the need for an intermediary, an attribute which could help revive peer-to-peer lending practices–digitizing what was once a manual process.

The business fundraising process has traditionally been a complicated one, dominated by a handful of powerful banks. But blockchain naturally connects all parties on a system, so the customer is linked directly to investors, with full transparency and a real-time view of finances on an immutable ledger. Through disintermediation, blockchain makes it significantly easier and faster for small and medium-sized companies–not just technology start-ups–to raise funds through equity.

The removal of these barriers reduces the need for complicated paperwork that has previously precluded many SMEs from engaging with banks. The automated nature of the process means that commissions, excessive brokerage fees associated with selling shares, and other overheads can all be slashed.

Importantly, the use of blockchain enables SMEs to sidestep the banks which, especially following the 2008 crash, have been acting more conservatively. Blockchain also opens up businesses to investors from all over the world, enabling both investors and start-ups to seize opportunities which had previously been closed to them.

What’s Next for Blockchain Funding?

Blockchain has the potential to completely reinvent the wheel when it comes to SME funding. The technology shows real promise in solving things once and for all: the inefficient and antiquated system of bank business loans is one that’s ripe for disruption.

The real challenge, going forward, will be the legality of smart contracts, and the global regulatory framework needed to establish true peer-to-peer lending across borders; just because it is legal in one country, does not make it so in the next.

However, the power and potential of blockchain and smart contracts is being recognized across the business and political spectrum. While it may take regulators some time to catch up, broader adoption will lead to sensible regulation.

About Peter Edgar

A  highly motivated, ambitious and dynamic professional with demonstrable success in all areas of finance and due diligence, Peter graduated in Mathematics then excelled as a financial auditor, developing a keen eye for detail and an analytical mind right from the beginning of his career. He qualified in accountancy (ACCA) in 2004 with subsequent industry experience leading teams within start-ups, SMEs, and PLCs. Having progressed through and managed all areas of accounting and finance he can work hands-on or high level in any arena. Peter started working alongside Rob Whorrod in 2010 and has rapidly become very experienced in the integration of new acquisitions. He has also become expert in the preparation and structuring of manufacturing businesses’ in advance of sale.

Does blockchain technology open up new opportunities and revenue streams for SMEs? Let’s hear your thoughts in the comments section below.

Images via Pixabay

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