The Impact of Blockchain Technology on Small Business FinancingMar 13, 2023
Small businesses are really important for an economy. They make new things and help create jobs, which helps the economy grow.
However, small businesses often face significant hurdles when it comes to accessing financing. Banks and other traditional lenders can be reluctant to lend to small businesses due to their perceived risk. This is where blockchain technology comes in. In this blog, we'll explore the impact of blockchain technology on small business financing.
What is Blockchain Technology?
Blockchain technology is a form of distributed ledger which allows for transactions that are secure, transparent, and cannot be tampered with.
It is based on a decentralized network of computers, which work together to validate and record transactions. A collection of numerous transactions is stored in every block of the chain, which is linked to the previous block in the chain, resulting in an unalterable record of all transactions.
The Impact of Blockchain Technology on Small Business Financing
Blockchain technology has the potential to revolutionize small business financing in several ways. Let's take a look at some of the ways in which blockchain technology can impact small business financing.
One of the biggest advantages of blockchain technology is its ability to reduce costs. Traditional lenders often have high overhead costs, which are passed on to borrowers in the form of higher interest rates and fees. Blockchain technology, on the other hand, eliminates the need for intermediaries, such as banks and other financial institutions, which can significantly reduce costs.
Blockchain technology can also increase transparency in small business financing. The decentralized nature of the technology means that all parties involved in a transaction can see the same information in real-time. This can help reduce the risk of fraud and increase trust between borrowers and lenders.
Blockchain technology can also facilitate faster transactions. Traditional lending processes can be slow and cumbersome, with lengthy application processes and approval times. Blockchain technology can automate many of these processes, streamlining the lending process and reducing the time it takes to access financing.
Access to Global Markets
Blockchain technology can also provide small businesses with access to global markets. The decentralized nature of the technology means that transactions can take place across borders without the need for intermediaries. This can help small businesses tap into new markets and expand their operations.
Blockchain technology is also highly secure. Due to its decentralized nature, the technology lacks a central point of vulnerability, rendering it significantly more challenging for hackers to launch an attack against the network.
This can help protect small businesses from cyber threats and keep their financial data safe.
How to apply Blockchain Technology on Small Business Financing
Applying blockchain technology to small business financing can be a complex process. However, by following the steps below, small businesses can begin to explore the potential of blockchain technology for financing.
Step 1: Understand Blockchain Technology
Having a fundamental comprehension of blockchain technology and its functionality is crucial prior to implementing it in the financing of small businesses.
As we mentioned earlier, blockchain technology is a type of distributed ledger technology that enables secure, transparent, and tamper-proof transactions. It is based on a decentralized network of computers, which work together to validate and record transactions.
Step 2: Identify Financing Needs
After obtaining a foundational knowledge of blockchain technology, it's crucial to determine the financial requirements of your small business.
This can include identifying the amount of funding required, the purpose of the funding, and the repayment terms. Understanding your financing needs can help you determine how blockchain technology can be applied to your small business.
Step 3: Explore Blockchain-Based Financing Options
There are several blockchain-based financing options available for small businesses. These include:
- Initial Coin Offerings (ICOs): ICOs are a form of crowdfunding that allows small businesses to raise funds by issuing digital tokens on a blockchain network. Investors can purchase these tokens with cryptocurrency, and they can be traded on cryptocurrency exchanges.
- Peer-to-Peer Lending: Peer-to-peer lending platforms use blockchain technology to connect borrowers directly with lenders, eliminating the need for intermediaries such as banks. This can reduce costs and increase transparency in the lending process.
- Supply Chain Financing: The application of blockchain technology can facilitate the development of a secure and transparent platform for supply chain finance, connecting buyers, sellers, and financiers.
This can help small businesses access financing based on their supply chain relationships.
Step 4: Choose a Blockchain Platform
Once you have identified the blockchain-based financing option that best suits your small business's needs, it's important to choose a blockchain platform. There are several blockchain platforms available, including Ethereum, Hyperledger Fabric, and Ripple. Each platform has its own unique features and benefits, so it's important to research each platform and choose the one that best meets your small business's needs.
Step 5: Develop a Smart Contract
Smart contracts are like computer programs that make sure that two people follow through on what they agreed to do without needing someone to watch over them.
They are a key feature of blockchain technology and can be used to automate many aspects of the lending process. Developing a smart contract requires a deep understanding of blockchain technology and programming languages such as Solidity.
Step 6: Launch the Financing Platform
Once you have developed a smart contract and chosen a blockchain platform, it's time to launch your blockchain-based financing platform. This can involve marketing the platform to potential investors and borrowers, setting up the necessary infrastructure, and launching the platform on the chosen blockchain network.
Step 7: Manage and Monitor the Platform
After launching the platform, it's important to manage and monitor it to ensure its continued success. This can involve monitoring the performance of the platform, responding to user feedback, and making necessary updates and improvements to the platform over time.
MoneySkool can help with Small Business Financing
Although blockchain technology holds the potential to transform small business financing, it is still a relatively new technology, and many small businesses may not know how to take advantage of it. This is where MoneySkool comes in.
MoneySkool is a financial education platform that can help small businesses learn more about blockchain technology and how it can be used to access financing. MoneySkool provides a wide range of educational resources, including articles, videos, and interactive courses, that can help small businesses understand the potential benefits of blockchain technology and how to access it.
Blockchain technology has the potential to revolutionize small business financing, providing lower costs, increased transparency, faster transactions, access to global markets, and improved security. However, many small businesses may not know how to take advantage of this technology.
MoneySkool can help by providing a wealth of educational resources that can help small businesses learn more about blockchain technology and how to use it to access financing. With the right knowledge and tools, small businesses can take advantage of the many benefits that blockchain technology has to offer.
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