The small and medium-sized (SMB) financing world can be one of the most frustrating and challenging aspects of operating your business. You’re off to a solid start, your credit scores are excellent, things are running smoothly, and you’re ready to take your company to the next level. However, you can’t find a bank that will give you the business loan you so desperately need to take the next step.
Perhaps even more frustrating than being declined is trying to figure out why. Shockingly, it can come down to a mere clerical error, such as a mistake made with your Standard Industrial Classification (SIC) code—the four-digit number used to classify the industry you’re in. This happens more often than you think. There’s also the inconsistency of commercial credit reporting, as it’s not uncommon for the companies you do business with to neglect to report your positive business dealings to the three major credit bureaus: Equinox, Transition and Experian.
Surprisingly, there is no legal requirement to disclose why you and your business were turned down or even provide you with a copy of the report leading to that decision.
The SMB lending space has been desperate for an easier, faster, less costly and more transparent method for securing a loan. This is precisely where blockchain technology can make a significant difference. We touched upon the blockchain effect in the SMB lending space in a previous blog, and now we’ll take a closer look.
"...one of the reasons blockchain is so secure is the unique timestamp given to each transaction as it moves through the process, making it unalterable."
Blockchain utilizes an expanding series of records bound to one another through cryptography. Where this technology truly shines is in its ability to provide a secure environment for the execution of digital contracts, or “smart” contracts as they are called. These enable the lender to easily certify transactions, verify the validity of the parties involved, and quickly perform all those tedious and time-consuming loan administrative tasks. These also create a more inclusive and much fairer lending environment, not to mention costs are reduced, with the lender and borrower agreeing on terms directly, eliminating the need for a third party.
Regarding security, one of the reasons blockchain is so secure is the unique timestamp given to each transaction as it moves through the process, making it unalterable. These mark an exact time for each interaction, in chronological order. This eliminates any chance for tampering with, or misrepresentation of, the transaction’s data.
Blockchain Revives P2P Lending
While peer-to-peer (P2P) lending has emerged as an alternative to big banks for some SMBs throughout the last several years, the general consensus regarding the sector is there are still too many disadvantages. Chief among those is the fact P2P loans are exposed to higher credit risks, with a high percentage of borrowers who apply for those loans having lower credit ratings. There is also no government insurance protection for lenders in the event of borrower default. As a result, the initial frenzy over P2P has simmered down a bit.
"The often antiquated and always complicated system of obtaining a bank business loan might be becoming an option of the past."
However, the emergence of blockchain is changing the P2P landscape, and in essence, reviving it as a viable means for raising capital for SMBs. As an incorruptible, decentralized ledger, there is no need for an intermediary in the blockchain. The investor is directly linked to the SMB with full transparency and a real-time look at the fundraising process. All the typical overhead costs, upfront fees (sometimes as much as 10% of the loan amount), underwriting fees and closing costs are eliminated, as well.
P2P funding in the blockchain is also introducing SMBs to the potential of borderless financing, opening up doors to capital that were not previously on their radar. The often antiquated and always complicated system of obtaining a bank business loan might be becoming an option of the past.
Blockchain Challenges Remain
While these new opportunities are exciting, they are not free from complications. Regulatory framework is still an issue when it comes to lending across borders, and there are legal issues still being worked out with regards to blockchain’s smart contracts.
Obviously, we are in the very early stages of seeing what blockchain can really do, not only within the SMB lending space, but in all aspects of the financial world. But the future is loaded with possibilities, and SMBs are poised to take advantage.
Original Funding is always happy to discuss your lending options in a more in-depth conversation. We offer a roadmap to the capital you need, with flexible debt consolidation loan options, and multiple ways to help you qualify. Start your application today.