In many countries Small and Medium-sized Enterprises (SMEs) are the backbones of their economy. The UAE is no exception: according to the Khalifa Fund for Enterprise Development, 92% of all businesses fall into the category of SMEs. Indeed, the role of SMEs is crucial to the worldwide economy, with more than half of the overall world population working in businesses with an annual revenue less than US$40 million. Yet it’s also a truism that SMEs are often plagued by key issues such as lack of cashflow, lack of multiple income streams (dependence on one or two large customers) and lack of budget for core marketing and promotional efforts. This in turn can mean limited access to bank loans, factoring products – and perhaps most importantly, insufficient credibility for VC finance.
There is a (perhaps unlikely!) solution: blockchain. While most people think of blockchain in relation to large companies, blockchain also opens new opportunities to SMEs in every sector, solving existing challenges and enabling them to optimise their business model and revenue streams. Until recently, there were several obstacles which led to slower adoption of blockchain and other distributed ledger technologies by SMEs. But that is changing.
Let’s look in more detail at some of the core challenges that SMEs face – and then we’ll explain how blockchain can help.
Bank loans – and their absence
A big problem for SMEs, especially for first-time entrepreneurs, is to get a loan from banks for starting or growing their business. This is a principle reason why many of the new or ongoing small and medium-sized businesses disappear. Almost 30% of SME companies shut down in the first three years of operation due to lack of funding.
Since the banking (credit) crisis of 2008, banks are inherently risk averse, so their tolerance for SME lending has become relatively low. Last year’s report from the World Bank estimated that 70 percent of small, medium, and micro-enterprises are unable to access the credit they need. While the global demand for SME credit stands at $2,38 trillion, the truth is, only a fraction (about 12-15%) of businesses actually get the loan that they request from banks.
Another challenge for internationally operating SMEs is to get trade finance. Trade financing, much like many forms of credit provision, is a key component of the success of SMEs, but that key is not always easy to obtain. SMEs face all too many hurdles in their quest for funding, especially when it comes to accessing traditional trade finance products. Trade has changed dramatically in the last 10 years. But trade finance has not. The $1.5 trillion trade finance gap is driven by data shortfalls. The industry is still heavily paper-based and follows outdated processes and procedures. Typical trade finance operations are time-consuming, bureaucratic, and simply too expensive for new SMEs. This disproportionately impacts small- and medium-sized firms – and, statistics show, a higher percentage of firms in Asia and the Pacific.
Cash flow issues
Inability to bring in capital continues to cause enormous harm to small businesses – stifling growth and causing cash flow difficulties. In fact, 55 percent of small businesses reported cash flow issues within the past year. Businesses need cash flow to pay for materials, start the production process, pay employees, or cover any other business expenses. For smaller companies a late payment can be the difference between success and failure.
Adoption of new technologies
Another major challenge for many SMEs is how to deal with new trends in digitalization and automation. While large corporates often have the resources to react promptly, experiment and develop new products and services and therefore benefit from the new technologies like blockchain, this is not the case for many SMEs.
Many small- to medium-sized companies find it difficult to get started with new technologies since the scale of SMEs is often too small. Most SMEs miss the manpower, skills and knowledge to develop new strategies on such new trends.
Blockchain presents itself as a solution to these challenges. It can, quite literally, solve the problems in the areas of funding and trade finance. Though it makes sense to use Blockchain for money-related activities, it may also be used to solve many inefficiency problems. Safe and secure data transactions and smart contracts may optimise supply chains and improve client satisfaction by automated services.
For example, blockchain could became a game-changer for SMEs that are looking to expand abroad in their search for trade finance. Trade finance products are being made more efficient due to transparency and the consensus mechanisms that replace multiple instances of verification and checking.
A new study by the World Economic Forum and Bain & Company shows that blockchain technology could play a major role in reducing the worldwide trade finance gap, enabling trade that otherwise could not take place. Another finding is that the impacts would be largest in the emerging markets and for SMEs – which could adopt the use of the technology beyond well-established markets and corporations.
The Asian Development Bank forecasts the global trade finance gap currently stands at $1.5 trillion, or 10% of merchandise trade volume and is set to grow to $2.4 trillion by 2025. But the results from the new study shows the gap could be reduced by $1 trillion using blockchain technology efficiently.
Supply chain finance
Blockchain technology can also contribute to solve the problem of getting supply chain finance. A bigger segment of the market is currently building open account solutions. But because of the difficulty in tracking how deep the supply chain is, often financing is only offered a few tiers deep. As blockchain is much more flexible with data than existing digital systems, this technology opens up the possibility of a new level of financing.
On blockchain, both suppliers and buyers have access to necessary transactional information in real-time. Every step of the supply chain process is time-stamped and verified by all parties, meaning that information is accurate and immutable. This added level of visibility may also mean that businesses will have more invoice financing solutions available, too. So, this transparency may result in faster transaction processing, improved cash flows for suppliers, and potentially better rates from invoice finance providers.
One of the most attractive features that blockchain has is the potential to offer SMEs smart contracts, which not only define the terms and penalties around an agreement in the same way that traditional contracts do but also automatically execute and enforce those pre-agreed terms and conditions (but without the need for middlemen). Many labour intensive and expensive business processes can easily being replaced at little cost.
The largest opportunities could come from smart contracts, and single digital records for customs clearance. Smart contracts can represent an invoice, or any similar financial document, and be used as collateral to support a loan. They would help mitigate credit risk, lower fees and remove barriers to trade.
Blockchain technology has the potential to completely “reinvent the wheel” when it comes to SME funding. Blockchain could help revive peer-to-peer lending practices that have emerged outside of the regular banking system, by digitizing what was once a manual process.
Blockchain makes it significantly easier and faster for small and medium-sized companies – not just the technology start-ups favoured by crowd funding – to raise funds through equity. The removal of these barriers reduces the need for complicated paperwork, while the automated nature of the process may mean that commissions, excessive brokerage fees associated with selling shares, and other overheads can all be left behind.
SME-focused blockchain platforms
To help increase blockchain’s adoption across multiple industries and make entrepreneurs aware of the technology’s potential, a large number of ‘open source’ collaborative blockchain platforms have been created – two of the best-known examples are Hyperledger and Ethereum. Their main goal is allow enterprises to build customised blockchains that would answer specific needs instead of letting companies solve issues on their own. In recent years, platforms specifically focused on SMEs have been launched such as We.Trade and Karma.
First of all, the risk of getting no funds at all will be greatly reduced. Because there is no doubt about when funds will be released, companies can deliver services in time knowing that funds will always be available when they should be. Payments for goods from distant buyers and payroll to overseas employees can become easier and can be completed at a fraction of the current costs. As a result, it can help bring products and transactional services to market quickly and inexpensively.
More safe and secure transactions
Security and transparency will also prove to be value-added benefits of blockchain for businesses. For SMEs with global aspirations, blockchain technology using secure communication techniques may guarantee more safety and security in their transactions.
Cost efficient processes
Blockchain applications will definitely streamline business processes and offer a great potential for reducing costs and the complexity of processes.
Significantly reducing overhead costs is a major advantage for small businesses hosting services on the blockchain. Using blockchain means reducing the amount of resources and time entrepreneurs put in for administrative tasks. The cost savings can be passed onto customers to make prices more competitive. This may allow SMEs worldwide to compete on a more level playing field.
Looking at these advantages, it’s easy to see why a growing number of entrepreneurs in the SME world are willing to invest more into blockchain. With blockchain and related services such as smart contracts, the SME world may expect to see a total transformation of how it does business. Blockchain will make international dealings more conducive for SMEs and may allow them to compete in ways that today, are simply unthinkable.