The Impact Of Blockchain On SME Lending

One interesting result from the recent Small Business Credit Survey 2019 shows that the share of applicants who sought loans, credit lines or cash advances from online lenders has grown remarkedly since 2016 from 19 per cent to 32 per cent, and among all reasons cited on lender choice, the top three reasons for this trend were: 1) speed of decision making, 2) perceived chance of funding and 3) no collateral was required. Although this was a survey done in collaboration with 12 Federal Reserve Banks across the U.S., it reflects the overall borrowing experiences of small businesses across the globe.

- Lilian Teo And Toniya Sundaram

Just like large corporates, SMEs need to deal with similar issues such as managing working capital, taking care of late payment and collection and handling of international customers, yet the latter’s access to longterm or more sophisticated funding is often restricted.

Banks are traditionally the main provider of debt financing to businesses including the SMEs. Notwithstanding, adopting the relationship-based corporate banking model on small businesses for the banks is often too costly given the usual smaller loan size taking the existing labor-intensive processes into account. Being in a highly regulated industry, the banks generally require more paperwork and lengthier Know Your Customer (KYC) process amid their manual processes and unintegrated tools. The higher inherent risk of SMEs is another factor for the banks which generally have lower risk appetite to service this segment. This results to increased cost of borrowing for the SMEs plus imposing collateral requirements, which often become a bottleneck to appropriately service SMEs as they generally do not have any tangible asset for collateral.

OVERVIEW OF BLOCKCHAIN