What is Blockchain and How will it impact the small business loans?
| BySanya Uppal
Blockchain has become one of the most widely discussed buzzwords. Everyone is
talking about it. It’s the ‘next big unlock’. If you are entirely not sure what
it is, don’t worry, you’re not alone.
This article talks about the blockchain technology and how it can affect small business loans . You will understand what the blockchain is, how it works, and how the lenders are expected to use it in the future.
Let’s explore the blockchain technology and its potential impact on the small business loans.
What is blockchain?
Many of us think that the blockchain can only be used for the creation and exchange of cryptocurrencies like Bitcoin, but that’s not true.
The blockchain technology is bound to innovate the way in which companies create, verify, and enforce transactions without a middleman or central authority. Blockchain is basically a decentralised ledger which keeps the records of the transactions chronologically. It records the transactions like the exchange of money, property, or anything related to an enforceable contract or authorised access.
The term decentralisation means that multiple, independent machines are running copies of the blockchain ledger at once. Each recorded transaction is broadcasted to all the decentralized ledger copies.
The transactions recorded in the decentralized ledgers are verified by double-checking with the rest of the ledgers.
A typical transaction undergoes the following three processes in a blockchain:
- Transaction creation
- Transaction verification
- Transaction enforcement
Here are some following points on how blockchain will it impact the small business loans:
It will help to provide accurate rating
There is a lot of prospect of blockchain technology in small business loans. During the financial crisis ‘Collateralized Debt Obligations’ or CDO’s, it caused the widespread panic in the global financial markets.
These loans were sold to investors under an AAA rating despite being of a sub-prime level. The inefficiency in flagging such sub-prime loans was that the loan repayment data behind them was not made available, ultimately leading to the widespread financial crisis.
However, with the blockchain technology at disposal, information can be derived from the ledger of repayments to determine if a loan is at risk of slippage. Thus, providing an accurate rating for small business loan repayment will become possible.
It will aid in interbank communications
Currently, the synchronisation of money transfers and creating reports takes days as the clearance comes from the central banks. There is always the risk of losing money in inter-bank transactions.
By using internal blockchain, banks can create a decentralized database for all transactions, making cross-border loans much more manageable to facilitate. Thus, synchronization can be virtually instantaneous. This could help lenders to provide the best possible small business loans to their borrowers.
It will simplify the lending process
The traditional small business loans have an extended lifecycle starting from customer facing, product selection, adjudication and pricing, funding and fulfilment, servicing, and asset management.
Customer information gathering is an intensive process, needing validation and confirmation during the onboarding stage to counter frauds.
With the blockchain technology, the entire process will become simpler due to the chronological data saved in the ledger and its access within a couple of seconds.
It will Introduce smart contracts.
Blockchain-based smart contracts will verify, negotiate and enforce the performance of a contract and thus have significant application for small business loans.
Digital recoveries could include a lender shutting down the borrower’s car electronically if he makes no payments. Smart contract parameter could also be leveraged to renegotiate the loan terms automatically based on business circumstances.
It will help in managing the digital identity
Blockchain technology can be used to trace and manage the digital identity of the borrower. Borrower’s identity can be uniquely authenticated in an accurate, indisputable, and secure manner. This will also help in the secure online account login of the borrower.
Some final words:
- Small business loans will become less risky due to the accurate loan ratings, thanks to blockchain technology
- Banks will be able to communicate better
- Loans will be easier to manage due to smart contracts.
Although it is still too early to tell what real impact blockchain will have small business loans. However, it looks like this might be the answer to the problems lenders around the world have been looking for.