Kirill Shilov

@kirillshilov

What do the future blockchain technologies provide for SME lending?

Small and medium-sized enterprises, or SMEs, are the backbones of our economy. You might be fooled into believing that huge companies like General Motors, McDonalds, or L’Oreal are the ones who have the power to employ the most people, but the truth is that it’s the SMEs that are the ones which employ the most people in the US, which is why the responsibility of owning and running an SME is as important as a breath of cool air after a desert safari.

The problem with the small businesses is, even when they drive innovation and competition in most economic sectors, their owners have a harder time finding the right way to lend their expenses away. This is due to a number of factors, including their business’ size, limited financial power in the first few months, and so on. It’s becoming harder by the minute to find a good lending partner, which is why many of the new or ongoing small and medium-sized businesses disappear under the crushing power of the no-lending hammer.

This problem is not only an SME one. This is a global epidemic so to speak, and the reason is that people are still not entirely educated on the technologies that the blockchain can implement for you and your business. Smart contracts could help businesses grow better and faster due to their main feature — the possibility of running fully automated programs.

1. The global struggle with SME loans

An important fact to realize is that businesses are becoming more global by the hour. The technologies are progressing along with them and accelerating the process for many of the businesses that matter for a large audience. The fact of the matter is that this is not the case for most small enterprises. There’s a reason why they are small:

  • they serve a certain population or region
  • they are branded and work better locally
  • they never have the capital in order to go bigger

Even if they do thrive and make a good figure in their own markets and grow locally, the problem with SME loans remain. Banks simply don’t want to get involved with a business unless that business is large or is expecting to grow in the next fiscal year. If that’s not the case, SME loans are basically nonexistent, which means that small business owners have two choices.

They can simply stay where they are and never see their businesses grow to their full potential. This could mean that a local brand that has worldwide potential could never see the world stage simply because of a failed loan.

They can also work their hardest in order to go fully global and have a strong partner, like a bank or a loan expert alongside them, in order to grow their business to a global scale.

Blockchain technologies will soon disrupt the way smaller businesses do loans and finance. These new technologies promise to once and for all end the institutional failings of the systems the banks have incurred over the small or medium-sized enterprises, who never seem to get a big slice of the pie. They are left with the scrapes no more, as crypto financing is constantly evolving, and will soon help small businesses grow the way they want to.

Could this new solution be the future for SMEs?

The short answer is yes, it can in fact be the solution. Or at least, depending on the domain of the business it could be part of the solution. While the problems that SMEs are facing are local, as most small businesses start out small, the solutions that the blockchain offers are global and at a much larger scale than the business owners can even begin to imagine. This is where solutions such as Traxia come in handy; getting the two parties together in order to create one functional solution that would benefit both parties.

2. Globalize your business to survive

Most SMEs don’t go fully global for one reason: lack of capital. In America alone, there are 30 million small and medium-sized enterprises that account for almost two-thirds of the net new private sector jobs in the last 10 years. And still, these companies never seem to have enough cash to go big, so they stay at home most of the time.

A simple solution would be to loan money in order to take that next step. This is how 74% of all new businesses do it in the US alone. Although the finance directors of these firms say that they are familiar with alternative finance methods, they simply never went through with finding a peer-to-peer lender or even do some crowdfunding for their business idea.

Despite the harsh environment, 8 out of 10 business owners prefer to go to a bank and ask for a loan, instead of at least considering any other type of financing for their enterprise. The truth is, only a fraction (about 15%) of businesses actually get the loan that they request from banks, a minimalistic margin if you look at the big picture.

Blockchain institutions promise global enterprises.

With the new blockchain technologies out there, services like Traxia will forever end the dispute between new companies and banks, not because they’ll mitigate them, but because they’ll remove them completely. When loaning from a service like Traxia, for example, you get the chance to grow your business globally without having to worry about not getting a loan if you get stuck. If your product is good, then the blockchain will most likely get behind it, and eventually you’ll work your way up from your current state.

About Traxia

Traxia, amongst Sp8de, Keep Network, and a few others, is one of the very first worldwide services that use the blockchain in order to solve the problems that SMEs have with their cash flow. To understand what Traxia is, we first need to look at the problems it says it will solve.

First, there’s the $43 trillion in accounts receivable at any given day, from which banks finance only 7% of these short-term assets. Second, banks keep arguing about liquidity problems in order to not finance SMEs, which is why small and medium-sized businesses get stuck while negotiating terms with their local banks. And third, your typical trade finance operations is time-consuming, bureaucratic, and simply too expensive for new SMEs. Banks use redundant paper trails and slow non-transparent and centralized credit decisions, which is never a solution.

Traxia promises a decentralized global trade finance ecosystem. By using the blockchain, they will be able to offer transparent, fast, and not so costly transactions for small businesses. The way Traxia works is by putting together a hardware component — the blockchain itself and the software component such as the tokens — which are the result of smart contracts.

Today, companies are obliged to play by the rules of the big boys if they want to survive the markets. The waiting period for a payment is set at about 70 days. Traxia comes in and, through LiqEase, solves this problem by allowing for a transparent platform for invoice trading designed just for SMEs. When the company provides the necessary paperwork, invoices, and other documents, LiqEase takes them and turns these assets into tokens, which are then traded on their market place.

Known as factoring, this scheme makes it possible for investors to buy invoices at a discounted prices, usually at about 5%, and for the small enterprises to not have to wait for up to two months for their payments, therefore no longer increasing their asset liquidities.

3. What does the blockchain promise?

With the help of these new technologies, like Traxia and the new cryptocurrency blockchain called Cardano, more and more smaller and medium-sized businesses will be able to afford a steady growth and enjoy a longer lifespan. The implementation of a system like Traxia to your business will once and for all end three of the main problems SMEs have when trying to loan some money from traditional places like banks or other methods of financing.

Problem no. 1: Bankruptcy

The main problem with small businesses is preventing them from going bankrupt even before starting to see some actual financial success. This is a hard thing to do when banks won’t loan you any money, especially when you’re just getting started. By using the blockchain you share your invoices on a global platform, which are then approved by all the terminals that work on the same blockchain.

Companies do go bankrupt when they run out of money to pay for expenses and other financial issues. This is then a cash flow problem, not an operational loss. This is where the blockchain can mitigate the problem to a simple solution and allow companies to be free from the thought of bankruptcy.

Problem no. 2: Bureaucracy

The most important problem any new business owner faces when starting out is bureaucracy. In the United States alone, 30% of the people who start a new business get stuck in the bureaucratic system and fail to actually see their business become a reality because of paperwork.

Business guru Gary Hamel compares bureaucracy with Ebola and even goes on to say that it’s worse than the disease because it affects a larger part of the human race and frankly, nobody wants to do anything about it. On the blockchain, there’s no paperwork that you need to worry about. There’s just interests, simple transactions, and nothing else. The less paperwork, the more business!

Problem no. 3: Incentives

Once you figure out the first two problems, the incentives are what remains. These are crucial if you want to grow the business to where you want it to be in, let’s say, three years from now. On the blockchain, the best idea is the one that’s going to grow the fastest because people will simply need it and then buy into it. Sure, investors who look into ideas on the platform have to first be convinced that the investing project is consistent and not a scam.

Another point is the globality of the platform. The more investors you can have on your platform, the more chances you have of getting your much-desired cash. It’s a game of cat and mouse, but the potential rewards are important.

After they are convinced, they will approve it and that’s a sufficient enough incentive for it to grow on its own. You don’t need to wait to get out there and do publicity stunts. The good ideas are always the most important and the ones which are supplied by the blockchain itself. All other factors are secondary and will not be important, thanks to the blockchain.

4. Is this the reality or just promises?

Of course, most businesses will question the remarks from above. And they are justified in doing so. The blockchain is still a subject that is spoken about in hushed tongues. Why should anyone trust the blockchain for such important things as SME lendings or any other types of operations with businesses, finances, and so on?

Trust is built over time, and in order for the promises to become a reality, some businesses must start trusting the process. They must be the visionaries that took the crazy leap forward and just went for it, proving to the world that there is a lot of opportunity in using the blockchain for absolutely everything related to business.

Blockchain technology is growing rapidly and boundlessly, which is why more and more people are looking into it and starting to invest in it. Here are three reasons why the blockchain is the future for SMEs lendings:

Reason no. 1: Universality

In Google Docs, you have the typical spreadsheet that you can work on yourself, or you can share it with third parties and work together on it. Every time you get to change something, or someone else does that, everybody sees the change in the document. On the blockchain, the spreadsheet is replicated into each and every single computer that is part of the blockchain, so every time you or someone else modifies something, the whole world bears witness.

The beautiful thing is, you can’t delete anything that has already been added, and you can only add data to the blockchain after you’ve been approved, so to speak, by a large number of users who consider you to be trustworthy. This is what makes the blockchain a universal tool, open for everyone, but most productive for the people who are trustworthy.

Although universal, this feature also has its drawbacks. For example, by being universal the blockchain will transform a simple smart contract into a very elaborate step, which will also threaten the anonymity of the people involved with it. This plays against the whole idea of the blockchain, which is supposed to be a transparent, yet a fully protective medium for everyone to work on.

Reason no. 2: More than cryptocurrency

Most people think about virtual currency like Bitcoin when they hear about the blockchain. The truth is, this is just one of the reasons why this new technology is so popular. This technology has endless possibilities. Take Ethereum for example; it’s an open software program based on the blockchain and has the main role of enabling software developers to create and forward very famous decentralized applications to the masses.

This is where Cardano, the “Blockchain 3.0,” is going to revolutionize the technological world. The Cardano blockchain relies on smart contracts in a new and more innovative way than before. This makes it a superior blockchain protocol than the ones developed thus far.

Cardano aims to solve four of the problems that the blockchains of the world today are dealing with. Those are governance, scalability, sustainability, and interoperability. This is why Cardano is the third generation of blockchains, ready to show its face to the markets very soon. Moreover, its price is extremely low to begin with, and the supply is enormous.

Today, if you were to create a new app, you’d have to go through legal professionals and have your app approved by third parties in order to have it spread out to the users. With a smart contract on Ethereum, you kill all of the middlemen and just skip the review, validation, and authentication of the app, simply allowing the users to make the best out of it.

Reason no. 3: Decentralization

The third and final reason why the blockchain is to be trusted by small businesses is decentralization. The banks are controlled by a mother bank, which is controlled by a monetary fund, which is controlled by a government, and so on and so forth. On the blockchain, there is no central hub. The transactions you make never run through a big data hub, like in the case of bank transactions. Instead, they are individual transactions that use their very own proof of validity, and there is also an authorization which enforces the constraints.

Every single transaction that you make runs through a world of private servers, which ensures that your information will never fall into untrustworthy hands. The risks are minimal, and even if a small fraction of the data does end up getting into the wrong hands, the entire system can operate smoothly even after encountering a problem.

Conclusion

Why are blockchain technologies perspective in this area? Can they transform and reorganize the industry, and how radically can they do it? Are they revolutionary or evolutionary? The short answer is: not at this time, but they are working on it. The technologies we have today are ready to spare most SMEs of many failures and harsh hours in which they try and convince banks or traditional investors to give them a chance.

With the blockchain

and services like Traxia, the business world can see a total transformation of the process which sits at the base of today’s economic pillars, the small and medium-sized businesses. The process will be the one which will be hard, but the possibilities for a transformation and reorganisation of the industry can be radical. This is not so much of a revolution but an evolution, a sincere step forward from the problems that the solution nowadays has.

Small and middle-sized enterprises have a hard time when they try to loan some money for growing their business. Banks are reluctant in giving the money away to a small business, which is why more and more of them are dying even before starting to grow. With blockchain technology and services like Traxia, SMEs can get the money that they need without worrying about banks and tedious contracts, waiting periods, and incentives.

The gap that SMEs financing faces in developing countries has four main causes:

№1: An asymmetry of information between future business owners and investors. If one of the parties doesn’t get the idea, motivation and plan of the other, the whole thing simply doesn’t work right from the start.

№2: The higher risks associated with an activity that works at a much smaller scale than usual. This means that the investors are afraid the whole thing might just be a waste of money, and would most likely not want to invest in it because it’s still so small.

№3: The transaction costs that are associated with small and medium-sized enterprise financing, which can be sizeable and therefore not cost effective for banks or investors.

№4: No collateral held by small businesses for their loans.

The problems are there to be solved. With financing based on the blockchain, maybe we’ll look at these problems in a few years and see them as ancient history.

About the author:

Kirill Shilov — Founder of Geekforge.io and Howtotoken.com. Interviewing the top 10,000 worldwide experts who reveal the biggest issues on the way to technological singularity. Join my #10kqachallenge: GeekForge Formula.

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