The future of lending could belong to a borderless financing system. This vision isn’t a utopia, as blockchain and cryptocurrencies are ushering in precisely this form of global financial system. Blockchain uses public ledger and decentralized transactions, and is being widely deployed across all sectors. Lending to small businesses, currently full of hurdles and disappointments may also see a revolution.
Cryptocurrencies are designed to sideline the mainstream and institutional financial system, especially the middleman. For SME lending, this idea holds great potential, as currently, half of loan applications get rejected in the developed world, and 70% in the developing countries. In addition, approval times are slow, and qualifying criteria such as credit scores are strict, making everyone wonder, ‘What is my business credit score’?
The failure of mainstream economy to meet SME fund requirements has led to a huge growth in alternative finance and fintech. These loans are fast, do not require high performance or credit scores, and are easily accessible. Alternative finance is expected to grow to $90 billion by 2020.
Peer to peer loans too are a huge draw, and blockchain platforms will add their weight to make them even more preferable. With complete transparency, decentralized operations, smart contracts and fast transactions, blockchain based lending platforms may hold the key to the future of SME funding.
Blockchain lending to businesses will hold several attractions. It connects an SME directly to the investor, and a real time tracking of transactions is possible. The public ledger keeps everything auditable and transparent, and there are no intermediaries. User verification and validation of transactions too are quick.
Blockchain based business lending also currently has its drawbacks. The smart contracts have a legal angle, and a regulatory framework is currently missing for across the border lending. The technological hurdles of making flawless apps too are bound to arise.