How Smart contracts and Blockchain can transform SME lending?

Small businesses are always looking for better options to raise capital. Whether it is for business expansion, increasing investors’ share of capital, or business acquisition, merger, or expanding area of operations and services, businesses look to raise capital from the market. Exploring Smart contracts and Blockchain for SME lending is becoming a popular method to achieve these goals.

Ever since the idea was first discovered, smart contracts in crowdfunding platforms have been a major game-changer for businesses that are looking for cheaper ways to raise money. To give you an idea about the crowdfunding equity platform, it is a way to increase share capital through investors by offering equity in their business. 

Private equity crowdfunding models offer a more reliable and easier option for raising capital for large institutions. Without going for the more traditional ways of capital sourcing, like bank loans, businesses look for crowdfunding to raise money in the initial stages of a company’s development or later on. It offers a reliable way to engage with customers even more and increase their faith in the company, which is much more important in the long-term survival and growth of the company. 

When it comes to private equity, the option seems fairly good and reliable for small companies or startups who are looking to get capital without having to give EMIs right from the beginning, as it won’t be viable because of low sales. 

In this blog, we are going to find out the importance of smart contracts in blockchain technology and how they make private equity lending easier. 

The importance of blockchain and smart contracts in SME lending

Ever since the advent of blockchain technology, blockchain experts and SME lending software designers have been trying to find out the areas of applying this advanced and more secure technical framework in business. 

Technical experts and designers feel that blockchain technology, especially its smart contracts feature, has a huge role to play in the lending sector. 

This is because it can help loan-giving companies and businesses to

• Streamline different processes
• Increase the transparency
• Faster loan approvals and disbursals
• Making online transactions and payments safe
• Reducing costs for SMEs and startups

The different roles of blockchain and smart contracts in SME lending

Let us now tell you in-depth about the role of advanced blockchain and smart contracts in the field of SME lending. 

Enhanced trust because of decentralisation

If you have even a basic idea about blockchain technology, you know how it works on a decentralised framework. This means that there is no single point in the network that has access to all the stored information details. This makes it safe to store private documents like loan agreements, payment histories, repayment schedules, and so on. It reduces the chances of online data theft and forgery since a block of data only holds a piece of information, and it is immutable. 

Reduced process and overhead costs with the use of smart contracts

With the help of smart contracts in blockchain, it is possible to reduce the time for clearances, approvals, and agreements to form between parties. Thus effectively SMEs can get disbursement and credit faster and at cheaper rates. For lending companies, it helps save time and engage with more clients, reducing physical paperwork. 

Automated process in the lending sector

Even after disbursal, there are many processes involved for loan disbursing companies like-

• Notifications for repayment
• Payment deadlines
• Receipts of EMIs 
• Debt settlements

With the use of blockchain, all these processes can be automated completely and do not need any form of human intervention. This will again save a lot of cost and time for both parties. 

Reduction in payment defaults and NPAs

Due to the automated process in blockchain, it is possible to reduce the risks of defaults and NPAs in the lending sector. Loan repayments are now entirely automated using smart contracts on blockchain.

No need for intermediaries now

With the help of blockchain, it can remove all the intermediary institutions and agents. This will enable SMEs to directly get in touch with loan companies and private equity investors. No need to pay any form of commission to these intermediaries now. 

Access to global funds

With the help of blockchain, both SMEs and private equity investors and lenders will be able to get in touch with one another and increase their reach globally.  With the use of blockchain’s decentralized network companies will be able to break out from their geographical barriers getting better deals and returns on investment. 

Features of a lending private equity platform that uses blockchain and smart contracts

Here are some of the features you need to look at on any lending or private equity investment platform that uses blockchain and smart contracts. 

Strong track record with a good reputation among investors. 

Check out for case studies or user testimonials while scrolling through a private lending platform. Look for websites that have worked with businesses in your niche before and helped them grow to large-scale companies today. These platforms do not only provide money but also open up networking opportunities with investors, and private equity capitalists. 

Find out more about their fee structuring and pricing

Before you launch your crowdfunding campaign on their website, make sure to check out the fees, pricing, or subscription amounts. Find out any reliable blockchain integration in crowdfunding platforms that has a lower pricing structure on fees, which enables maximum retail participation, other than looking for areas of investing only. 

Strong network with retail and VCs

You want to raise money in your business by offering equity rights? For this, it is important to check out the reach of the crowdfunding platform you are thinking of partnering with. 

It is important to look at your target audience and find out the lending software solutions they prefer to put their money in and get registered with those only. 

Marketing support

Launching a crowdfunding campaign to make people come and invest in your business ideas is not enough. It is half the job done only, as only marketing will make investors aware of your business campaign. 

It is thus better to choose a debt crowdfunding software that has inbuilt support for marketing giving you access to tools so that you can run your marketing campaigns online on their website. 

Transparency in due diligence

Some platforms screen different business crowdfunding campaigns before they go live to investors to protect the capital of their customer base. It also helps you to increase your credibility score as a business owner about to launch a P2P lending platform. 

Make sure to check out their terms and conditions, the process for due diligence, and whether you will get support in the process. 

Better flexibility

Different types of crowdfunding software and websites offer funding flexibility to their customers. Finding a platform that gives the flexibility to withdraw their investment without many terms and conditions is preferred by small and retail investors. They would offer different clawback and liquidity options at different tenures after a crowdfunding investment. 

Strong compliance and regulatory process in force

Private financing is all about maintaining compliance and following a set of rules laid down by the financial regulatory bodies. The platform should abide by all the laws and security protocols to ensure regulatory requirements are checked before they begin to pool up investor money for long-term investments. 

Better user experience 

A crowdfunding platform that is easier to scroll through gives better usability for investors and they are likely to become your partners. Before you are about to launch any private equity crowdfunding software or website on your own, make sure that the website design, is simple and the UI is attractive and easier for your end users to check out. 

Analytics support and getting access to reports

As you are about to get in touch with a lot of startups for crowdfunding it is important to give them analytics support using which they will be able to track the details of their ongoing campaigns. 

It is important to design a simple analytical tool that gives clear numbers and helps plot complex data and Excel sheets using simple graphs and bar charts. These will help you to get more business clients and encourage people to invest through your platform only. 

Giving post-funding support

Funding business campaigns using crowdfunding models is just the beginning. If you want to increase your list of clients, make sure to provide post-funding support as well like providing, like investor relations, compliance, and audits, and open up doors to further funding rounds for businesses. 

Final thoughts

So, to say a few points, there is a major role of blockchain and the use of smart contracts, especially in the lending and private equity segments. For SMEs and startups, it can help open up doors to faster loan processing and access to worldwide engagement. For the lending institutions, it will help save time, cost, and risks of loan defaults.