How Crypto-Based Microfinance Benefits Small Businesses

Starting your own business isn’t easy given the reluctance of banks to grant credit. Gone are the days when a compelling business plan would be enough to have the branch manager shaking your hand and bankrolling your venture. For entrepreneurs in developing nations, where even obtaining a bank account can prove challenging, getting their idea off the ground often calls for non-traditional funding. Crypto-based microfinance is one such solution.

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Unbanked Businesses Are More Common Than You Think

The unbanked are synonymous with Africa, where over 400 million adults lack access to the financial system, but can be found in their droves on every continent. In the U.S., for example, 8.5 million adults lack access to the financial system. Cryptocurrencies such as bitcoin have long been touted as a salvation for the unbanked, granting them a means of saving and exchanging value, but the benefit decentralized assets bring to small businesses is less documented.

SMEs, both banked and unbanked, face financial pressure from day one, paying proportionately more for goods, import taxes, legal and administrative expenses, and compliance costs than larger enterprises. As a result, many small businesses fold long before they’ve even had a chance to challenge the incumbents. Google and Facebook’s dominance of the advertising market, for example, is steadily increasing, with the introduction of regulations such as GDPR credited with disadvantaging smaller competitors.

Although most easily observed on a macro scale, it is on a micro level that this trend bites the deepest. Assetstream is a microfinance platform that assists SMEs that have been excluded by the traditional financial system. Its founder Thanin Piromward told news.Bitcoin.com: “When we hear the term ‘unbanked’ we tend to think of citizens of developing nations, but this is a problem which equally affects small businesses in these countries. They are denied access to services such as loans and other types of credit which are vital in ensuring early stage growth.” He continued:

Crypto assets and the rise of social credit can remedy this lack of access through exposing SMEs to a community of lenders who are willing to assess each business on its merits, and assign capital accordingly.

If Banks Won’t Lend, the People Will

Traditional microfinance has helped fund businesses in developing countries, but it’s not without its drawbacks: businesses typically pay more in interest for loans allocated in this manner, exacerbated by middlemen who bloat the terms offered to startups, whose founders often have nowhere else to turn. Crypto assets can offer a more transparent, frictionless, and trust-based alternative, particularly when combined with social credit, in which participants who earn and maintain trust are more likely to be allocated capital by lenders.

In the cryptosphere, microfinance assumes a number of forms, but at its core, it revolves around funding community-backed borrowers, who have demonstrated that they are of good character and sound business model. Business owners who pass these tests with flying colors can unlock capital in the form of BTC, ETH, stablecoins, or other crypto assets, with lenders receiving monthly interest payments in return. This system effectively bypasses banks altogether, which are no longer the gatekeepers that decide which businesses flourish and which are left to die.

Crypto-Powered Microfinance in Action

The number of crypto-based tools for small businesses is proliferating, aided by the growth of the decentralized finance (defi) movement, led by lending platforms such as Dharma and Compound. There are services such as Sweetbridge, too, which enables businesses to tokenize illiquid assets, releasing the unrealized value trapped within them, which can then be leveraged to obtain finance.

Dharma’s lending rates

Businesses can also utilize crypto lending services such as Cred, which lends fiat for crypto collateral, including BCH. Similar facilities are provided by Nexo, SALT, Youhodler, Ethlend, and others. These services, of course, require businesses to have access to crypto assets in the first place in order to obtain a loan. For business owners that have nothing to their name, save for some goodwill, crypto-based microfinance services such as Moeda and Assetstream bring counterparties together, enabling lenders to see where their money’s going, and borrowers to see where it’s originated. In addition to forging closer ties and increasing transparency, such initiatives help unbanked businesses obtain credit, while driving another nail into the coffin of the legacy financial system.

Do you think crypto-based microfinance can help small businesses? Let us know in the comments section below.

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