How can SMEs benefit from alternative finance through blockchain?

Traditional finance (TradFi) has long been the go-to source of financing for businesses but it’s not always the best solution for small and medium enterprises (SMEs). The global lending gap, currently estimated at around $1.7 trillion continues to widen, especially impacting SME’s and the communities and economies which they fuel. There are estimations that this lending gap will widen in the next years, reaching a value of $5–7 trillion, so these companies should look into alternative financing methods, namely those powered by blockchain technology.

TradFi lending limitations

TradFi providers such as banks and other financial institutions are limited in how they finance and the growing constraints of the finance world impact smaller companies. TradFi’s narrow focus on established businesses with a track record of revenue and profitability can make it difficult for new or emerging businesses to access financing, as they may not have a proven track record of financial performance. They usually have a limited offering of lending solutions, like term loans or lines of credit, which may not be suitable for all types of businesses. Furthermore, traditional finance providers normally have rigid underwriting criteria, such as a certain level of collateral or a minimum credit score which can make it difficult for SMEs to qualify for financing. Another limitation is the slow approval process for financing, which delays the disbursement of funds to the borrower, a challenge for businesses that require quick access to financing to take advantage of opportunities or cover expenses. Geographic limitations are another issue, as traditional providers may only operate in certain regions, limiting access to financing for businesses in other areas, such as those located in emerging countries.

Difficulties of SMEs in accessing financing

Many SMEs lack the necessary collateral to secure a loan from traditional lenders, which is often required to guarantee the repayment of the loan and mitigate the lender’s risk. These companies usually also have a limited credit history, which makes it difficult for them to qualify for a loan. Lenders typically assess an applicant’s creditworthiness based on their credit history, which provides an indication of the applicant’s ability to repay a loan and SMEs may not have the necessary financial statements to demonstrate their ability to repay a loan. Banks typically require financial statements, such as balance sheets and income statements, to assess the financial health of a company and SMEs are normally perceived as higher risk by lenders due to their size and lack of established track record. As risk models are normally thought out for other types of companies, this may make lenders more cautious about extending credit to SMEs, or result in higher interest rates or more stringent loan terms. SMEs may not have the same level of access to financial information as larger companies, as well as the necessary resources or expertise to produce financial statements, which may make it difficult for them to identify financing opportunities or negotiate favorable loan terms.

These factors can make it challenging for SMEs to access financing, which limits their ability to grow and expand their business operations. However, the enumerated limitations have given rise to alternative financing options, such as crowdfunding, which relies on the power and generosity of individuals that want to support a project, peer-to-peer lending, which also has its own risks, and blockchain-based financing platforms, which can help SMEs overcome some of these challenges and access financing in innovative and efficient ways.

Blockchain-based financing solutions

Small and medium-sized enterprises (SMEs) can benefit from alternative finance in the blockchain industry in several ways:

· Better access to liquidity: decentralized finance (DeFi) solutions provide SMEs with an opportunity to raise capital without the need for intermediaries. By tokenizing their real world assets, like inventory that is stored in the company’s warehouses, invoices that are issued daily, SMEs can access liquidity without having to resort to a bank.

· Faster access to funds: traditional lending processes can be lengthy and time-consuming, which can be challenging for SMEs that require quick access to funds. Alternative finance platforms based on blockchain technology can provide SMEs with quicker access to funds as transactions can be completed faster and with greater transparency.

· Reduced transaction costs: Blockchain-based alternative finance platforms can help SMEs reduce transaction costs and fees, which can help them save money and increase profitability, without having to pay high-interest rates and transaction fees.

· Increased transparency: The use of blockchain technology, a decentralized ledger that records all transactions and is accessible to all participants in the network, provides increased transparency for SMEs, helping them build trust with their investors and lenders, and increase their reputation in the market.

· Access to a global market: alternative finance platforms can provide SMEs with access to a global market of investors and lenders, available 365/24/7, which can help them expand their business operations and reach a wider customer base.

Defactor [Official]’s platform is one such blockchain-based financing solution, enabling growing businesses to secure alternative sources and providing a core set of features to onboard and validate alternative financiers to obtain access to the liquidity that is available in the DeFi space. They are supported by the community, which stakes $FACTR, and an ecosystem of partners, like Centrifuge, that provides value added services. For SMEs interested in accessing alternative financing through Defactor, the starting point is ensuring that the company’s processes can be digitized and understanding how this alternative finance method would fit into their lines of business. Blockchain is capable of disrupting all areas of society and the companies that onboard on these types of platforms will be considered early adopters and lead the Blockchain revolution. Check out https://defactor.com/ to better understand if this makes sense to your company!