In many countries Small and Medium-sized Enterprises (SMEs) are the backbones of their economy. Their role is crucial to worldwide economic and social developments, with more than half of the overall world population working in such companies. In the Netherlands for instance, more than 90% of the Dutch companies are SMEs and together they produce 60% of the added value of the Dutch Economy. SMEs however are confronted with a number of important challenges. including limited access to bank loans, inefficient procedures and lack of information necessary to conduct business efficiently.
While most people relate blockchain to large companies, blockchain also opens new opportunities to SMEs in every sector to solve existing challenges and enable them to optimise their business and develop new business models. Up till 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 have a look!
SMEs and present challenges
Despite their status as the backbone of any major economy, SMEs face many challenges. They have a great problem in finding financing, scale their operations, process payments and recruit other ancillary services that are both necessary to grow or go global. For emerging economies, increasing access to credit is key to generate of new jobs and economic growth.
A big problem for SMEs, esp. for beginning entrepreneurs is to get a loan from banks for starting or growing their business. This is 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 stand at $2,38 trillion, the truth is, only a fraction (about 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 providing, is a key component of the success of SMEs, but that key is not always easy to obtain. SMEs face lots of 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 as a result still time-consuming, bureaucratic, and simply too expensive for new SMEs. This disproportionately impacts small- and medium-sized firms and 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, 40 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.
Limited alternative financing
These SME companies nowadays often turn to alternative forms of financing to obtain funds and ease their cash flow issues. In recent years, the peer-to-peer (P2P) lending system emerged as an alternative to the bank loans. And this segment is growing. Crowdfunding has also emerged to fill the gap in the market, but is mainly focused on technology start-ups. This new funding route is closed to most SMEs from other sectors.
Personal identity and data control are major concerns for online retailers as most of the interactions between customers, and online retailers are controlled via usernames and passwords stored in centralized platforms. Such platforms are vulnerable to hacking, and user data can be accessed and misused by hackers. Next to that people can easily falsify documentation and identity proofs.
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 thus benefit from the new technologies like blockchain, this is not the case for many SMEs.
This while they are experiencing problems for which these solutions including blockchain could be a solution. Many small- to medium-sized companies find it difficult to get started with new technologies since the scale of SMEs is often too small, among other reasons. Most SME’s miss the manpower, skills and knowledge to develop new strategies on such new trends.
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Blockchain technology is more commonly talked about in relation to corporations. This includes everything from banks streamlining their transactions and the sale of products to manufacturers improving their supply chain and global tech companies utilising blockchain technologies for any number of applications.
What about SMEs though? Are there any benefits to investing in blockchain, and are there any applications or practical use examples that deliver a return on investment?
After all, blockchain is still in its early stages. Unlike corporations, SMEs can’t afford the cost and don’t have the resources to take a punt on something so new.
That said, we are now starting to see blockchain technologies, also known as distributed ledger technologies, that are both practical and cost-effective for SMEs and that deliver a return.
Why Should You Care About Blockchain?
As an SME, you get all the same benefits from blockchain that a corporation gets. This includes:
The decentralised nature of the technology, which removes middlemen.
Immutable records that can’t be changed once they are created, improving the auditing process.
Efficiency plus the enablement of fast transactions.
Reducing costs when implemented properly.
Using highly effective encryption technology so it can improve security.
How Can You Use Blockchain Technologies as an SME?
What about practical examples of how SMEs can implement distributed ledger technologies? Here are some that are possible uses.
Transferring Money, Making Payments, and Receiving Payments
One of the first uses of blockchain technology is related to finance and the transfer of money. Businesses are increasingly utilising the opportunities this presents. Accepting payments in currencies like Bitcoin is the obvious example. You can also use tools and applications to pay suppliers or remote employees in a way that is faster, more secure, and lower cost than traditional methods.
This usually happens through public blockchains, which face some issues, like scalability. However, there are improvements taking place in this area. Plus, there are some solutions like Ripple, which are not public blockchains, but they benefit from very fast transaction speeds.
One major reason an SME might want to do this, is to facilitate payments from other countries and continents, where money transfers might be take a long time.
Cloud Storage Based on Blockchain Technology
Cloud storage solutions built using blockchain technology are known as distributed cloud storage solutions.
A standard cloud storage provider rents out the storage space it has in a data centre. Distributed cloud storage, however, is essentially a peer-to-peer network. So a company or individual can rent out their unused hard-drive space, with blockchain technology ensuring its security.
For most SMEs, this means you have access to lower-cost cloud storage solutions as distributed cloud storage is much cheaper than mainstream cloud storage providers.
They also deliver excellent performance in relation to download and upload speeds. This is because the data is distributed so there are multiple downloads and uploads happening at the same time.
Some example solutions in this space are Storj and Sia.
With a smart contract, all parties involved in the contract set and agree on the conditions. There is full transparency throughout the process, with all entries to the ledger becoming available in real time.
In addition, the contract is highly secure, plus the blockchain technology ensures the conditions are met before the contract can move to the next stage (e.g., releasing payment). Furthermore, the terms and penalties that are agreed in the contract execute automatically, without the involvement of a middleman. There is also no need for multiple approval processes as approvals are automated. The result is a more transparent and efficient process that saves money, saves time, improves cashflow, minimises disputes, and more.
The first blockchain to use smart contracts was the Ethereum blockchain. Smart contracts are easier to develop that most people think, with tools like the Remix IDE being freely available. In some cases, you don’t even have to code. For example, the erc-721 standard, lets you create non-fungible tokens, which can be used to identify asset ownership. You could use this, for example, to store ownership of a work of art on the blockchain, or of some other asset your company possesses.