The strength of every nation’s economy is usually a direct reflection of the viability of the Small and Medium scale Enterprise (SME) sector.

The impact of SMEs on the Gross Domestic Product (GDP) of nations cannot be over-emphasized. In most cases, especially developing countries, SMEs account for as much as 35-40% of the total GDP.

SMEs lack of loan options

The backbone of the SME sector of the economy is its access to affordable funding schemes. Strenuous banking processes and high interest rates appear to be major stumbling blocks to the success of SMEs, especially in developing countries.

Among other factors, the risk posed by the inability of SMEs to repay loans play a huge role in the reluctance of most banks when dealing with such organizations. Since most SMEs may not have assets that could pass as sufficient collateral, most banks would rather deal with companies with established track record and tangible assets.

Therefore, while banks seek guarantees for their facilities, these enterprises struggle to go a step further than just an idea.

The power of the Blockchain

Using Blockchain technology to disrupt the existing lending or borrowing systems within the financial sector is an innovation that merits attention.

Kumar Gaurav, Founder of Auxesis Group & Cashaa, tells Cointelegraph that Blockchain technology is aiding the facilitation of new models with more flexible conditions such as p2p lending, crowdlending, and microlending.

Gaurav says:

“With cryptocurrency, for the first time, it is possible to send smallest amounts of money anywhere in the world without fees. Lenders and SMEs get connected directly, making the process faster, cheaper and easier”.

He continues by explaining that whereas traditional lenders would invest depending on their own, less transparent criteria, Blockchain technology facilitates everyone to become a lender, apply their personal criteria and track the fulfillment of these in real-time. Additionally, a loan can be tokenized and traded, which gives liquidity to an otherwise illiquid asset, and minimizes lenders risk by dividing a loan into smaller parts.

Earlier this year, a joint venture between fintech and analytics provider Ipreo and distributed ledger technology Symbiont aimed to solve such issue. Known as Synaps Loans, they have created and tested a working Blockchain solution for servicing syndicated loans.

In its original concept, a syndicated loan or syndicated bank facility, is a loan offered by a group of lenders – referred to as a syndicate – that work together to provide funds for a single borrower. The borrower could be a corporation, a large project or a sovereignty, such as a government.

Whether Synaps Loans will employ Blockchain technology mainly for the sake of efficiency in servicing the aforementioned exclusive class of businesses, or whether they will explore technologies such as the smart contracts of Ethereum to cover SMEs as well may be part of the details to be known in the coming months as indicated by Emmanuel Aidoo, head of the distributed ledger and Blockchain effort at Credit Suisse.

Aidoo says:

“Over the coming months we will work with Symbiont and Ipreo to implement the remaining functions to allow for distributed ledger technology to support a syndicated loan facility from origination to payoff, and work toward market adoption. The technical and market expertise that the project participants brought to the table means this solution will be tailor-made for use in live transactions.”

Special attention on SMEs

Another Blockchain company that claims to enhance business and entrepreneurial loan services is Singapore based WishFinance.

WishFinance claims to have its entire portfolio stored on a Blockchain, therefore enhancing transparency for funds, borrowers and investors. The company also claims to focus only on SME's which work with cashless payments (applepay, credit card, etc), offering only short-term (3 to 36 months) business loans.

Employing Ethereum’s smart contract and big data analytics, WishFinance claims to achieve its objectives of assessing an applicant by determining the SMEs reach and cash flow. In the area of loan repayment, WishFinance claims to connect to the acquirer providing POS terminal to the SMEs with its APIs and deduct 3-5% of each payment the borrower gets from its customers. This happens with the consent of the borrower, thereby introducing a systematic loan repayment procedure.

Other startups employing Blockchain-based lending systems include Bitbond, Bt crop, and Xcoins which use Bitcoin, while WeiLend, EthLend, and Lending Circles are examples using Ethereum.

Gaurav notes that his company, Auxesis Group, is developing a Blockchain solution called “Bitkarz” for the Indian Lending market, which will allow people all over the world to invest in SMEs that are part of India`s high growth economy, as well as investing in real estate through Bitcoin and other virtual currencies.

Whereas over 20 social lending platforms have been started in India over the past years and have thousands of users, there is still a lot of system fine-tuning needed to be done before they can be seen as serious competition to traditional institutions.

Solution: Blockchain-based loans

One of the major advantages of Blockchain-based loan systems is the fact the it offers accessibility to international capital and reduces the dependence on bank procedures. The system also offers SMEs the opportunity of becoming independent of other local institutions, thereby giving equal chance for both banked and the unbanked entrepreneurs.

Naturally, an increase in the number of possible lenders increases the chance of an SME meeting some lenders’ criteria and get a loan.

However, Gaurav notes that when everyone can become a lender, there is a higher risk of insufficient due diligence, hence he advocates the offering of minimal capital until there is adequate infrastructure to measure imported data of borrowers ahead of any given contract.

“The creditworthiness of some new groups of borrowers may be impossible to measure by any documents such as bank accounts, payslips etc.; social data can be a replacement but for that there first needs to be the infrastructure and standards for capturing and tracking this data. Therefore it is only expedient in P2P lending for now to invest only small amounts of money in diversified SMEs”.