Introduction
Capital is a very important tool for any business whether small or large. The challenge here is that sourcing capital has never been easy especially for startups in developing economies such as those in Africa. There are many entrepreneurs with great business ideas but no way to kick off because of lack of funding. And to make matters worse, loans are very difficult to access. But there could be a solution in web3.
Small business startups and other businesses could look to web3 to secure funding for their ventures. Web3 loans are flexible and have a lot of other attractions that could make them ideal for startups or business owners that are looking to add more funds to their business. Before I outline why web3 loans should be the next focus, look at some challenges with traditional loans.
The problem with traditional loans
There are many reasons why traditional loans are always very difficult to access especially for startups. Consider the following 3:
1. Impossible collaterals: Traditional financial institutions like banks require huge collaterals in order to process any loans. Such collaterals are often landed properties and other high value assets which a new business owner might struggle to provide. More often than not, such collaterals are out of the reach of a startup and thus, prevents them from accessing the loans.
Without collaterals, it is not easy to get loans from any traditional finance institutions like banks, cooperative societies and other institutions.
2. Credit history: Lending institutions often check the credit records or history of any borrower before they consider lending them some money. Most institutions have a credit rating system that scores users based on how good they are at repaying loans. If the borrower who owns the startup has a poor credit history, lenders often shy away from doing business with such ones.
The idea of the credit rating is that a user with poor credit scores is a flight risk and will not likely repay loans in time. So lenders rely on the credit history to vet candidates as to whether they qualify or not to receive their loans. If a startup owner is on the wrong side of credit history, then they may likely struggle to get loans.
3. Economic realities: Based on where a business is located, it might be easier or harder to have access to traditional lending facilities. In developed countries, credit facilities might not be so much of an issue due to their better economic facilities. But elsewhere, things might be more challenging economically.
For example, startups in developing economies like those in some parts of Africa and Asia might struggle to have available and accessible lending institutions. As a result, their geographic location then becomes an impediment to accessing loans. Many startups and small business in such environments thus struggle to fund their projects.
The above are some of the challenges that startups face when it comes to trying to secure loans. Web3 could be a place to run to for quick and accessible startup loans. Lets consider the possibility.
Web3 loans - why ideal for startups.
The traditional finance systems make it difficult for startups to access loans. However, web3 loans are set up a little differently. Consider the following cools things about it:
1. Accessible: Once cool thing about web3 loans is that the funds are readily available for borrowers. Such loans are powered by blockchain technology which is available 24/7 for anyone that has good internet connection. Crypto wallets are free to open.
So for startups looking to fund their business, they can apply for web3 loans and have them no matter where they live. National boundaries and physical locations are not limiting factors when considering web3 loans. Unlike traditional finance loans where a startup might be sited far from the nearest bank, web3 loans could be accessed over the internet right in the comfort of one's home.
2. No background profiling: Bank loans require lenders to do an extensive background check of the borrower. That includes checking their credit scores, business legitimacy, products/services and their viability. A lot of these processes not only disqualify many startups from getting the loans. For those that do qualify, these are lengthy processes that take time.
For web3 loans, credit worthiness and many other background checks are not necessary. Those are not the things that determine whether one is able to repay loans. So a startup owner who has a very terrible credit history could still qualify for web3 loans that are usually backed by collaterals.
3. Fast and no third parties needed: Another reason to choose web3 loans is that they are not difficult or complicated to process. A startup could access web3 loans in a matter of few minutes once they have the required collateral. This type of loan is not processed by some over-the-counter agent that runs through a lot of paperworks.
Web3 loans are usually programmed into smart contracts. These digital contracts check for the few requirements and once they are satisfied, the loan is released to the borrower. As a result, while traditional loans might take days or weeks to process, web3 loans could be accessed on the same day.
4. Inclusive: Web3 loans is for everyone - whether they are startups, small businesses or large organizations. Such a loan is not based on location because they are accessed over the internet. Web3 loans are not based on previous records of financial success or some amazing credit record.
Everyone is welcome to access web3 loans no matter where they are based, the industry they operate in or how long they have been in business. This is something not found in the traditional loan system. Only web3 makes this possible.
Five Web3 loan platforms
Talking about web3 loans, the discussion would not be complete if there is not a suggestion of lending platforms online. So below are 5 web3 lending platforms anyone could check out if they are considering taking some loan:
There are definitely many others, but a borrower might start comparing interest rates and repayment plans from the above five.
Conclusion
For startups looking for funds to launch their project, it is always going to be hard to qualify for bank loans of loans from other traditional financial institutions. Web3 offers more flexibility, more access, and a quicker processing times for loans. Of course, if you are a startup founder, always do your own research and try to see what works for you.
References
I consulted the following works while researching this topic:
- How Web3 is set to revolutionise lending, skip banks
- Top 5 DeFi Lending Platforms for 2023
- Top DeFi Lending Platforms In 2023