For any new or seasoned entrepreneur, finding a reliable source of funding is easily one of the biggest challenges in the business world. Banks and other traditional lenders will often require a rich financial and operational history, with many alternative lenders applying obscene rates for even the smallest business loans.
In fact, one report by CB Insights found that about 29 percent of startups failed because they ran out of working capital, which speaks volumes about the morbid state of business financing for startups and budding businesses.
Consequently, business financing has become one of the many areas of fintech that could benefit immensely from blockchain, the decentralized ledger that has been disrupting industries for over a decade.
Because of its unique framework, the blockchain promises to fix many of the issues that haunt the lending industry, including exorbitant transaction fees, slow transaction speeds, and weak security for transactions conducted on traditional financial platforms.
Here are a few ways that showcase why blockchain could change the way enterprises access funding.
Initial Coin Offerings for Legit Businesses
Initial Coin Offerings, often abbreviated as ICOs, are among the most popular applications of the blockchain. Over the past three years, startups have used ICOs to raise billions of dollars in funding, rivaling VC and private equity funds. Interestingly, the value of ICOs has ballooned to over $13 billion halfway through 2018 – a ridiculous figure considering a total of “only” $5.4 billion was raised in 2017.
On the flipside, however, ICOs have also seen investors losing millions of dollars to scammers and fake ICOs that quickly disappear after a flashy, well-organized PR campaign. And even after vicious campaigns by countries and regulators such as the Securities and Exchange Commission to clamp down on illegitimate ICOs, the trend still continues, making it a challenging platform for businesses to use as a fundraising platform.
But over the past couple of months, there’ve been signs that things will get better. New forms of ICOs have been coming up, with decentralized ICOs, dICOs, as one example. These investment platforms are faster and safer than traditional ICOs and allow regular businesses to fundraise like ICOs without the spammy description associated with regular ICOs.
Additionally, many startups and platforms are coming up that are looking to help regular businesses launch legit ICOs. Blockchain-powered platforms such as Securitize and Dispatch have specialized in helping regular businesses navigate the difficult world of ICOs. Eventum, another blockchain startup, enables businesses to spot and avoid crypto scams when investing or looking for funding on the blockchain.
Supercharging Existing Lending Platforms
The traditional lending industry has often been chastised for its slow lending procedures, hefty rates, and over-reliance on outdated credit scoring systems that often deny creditworthy individuals and businesses access to funds.
For instance, according to data published by Paydayr, about 13 million Americans have limited access to the traditional banking system, with over 20 percent of American bank account holders taking to alternative financing options for help, including payday loans and check cashing – all because of the stringent and dysfunctional lending rules that are characteristic of traditional lending institutions.
This is another area that is gaining mileage from the incorporation of blockchain-based technologies. Celsius, a blockchain-based lending platform, is hoping to disrupt the peer-to-peer lending industry by letting lenders interact without the hefty fees and slow processes from banks.
Wish Finance, another blockchain startup, is also doing groundbreaking work in the areas of risk scoring and loan repayments. This lending platform integrates its systems with a business’ POS system, allowing the business to take loans according to actual cash flow, while at the same time offering a simple platform for repayments via their blockchain platform.
Blockchain, just like many emerging technologies of the past few years, still has a long way to go before solid use cases can be identified. Still, many of the blockchain-based technologies that are currently in development or in beta stages of implementation are showing a lot of promise for the lending industry, especially where small and medium businesses are concerned.
Startups such as Pave and Bloom, with their blockchain-powered, data processing innovations in the area of credit rating, continue to prove that blockchain-based lending is the future, and might just be the answer to the limitations presented by FICO and other traditional credit scoring models.