One of the things that drew me to the world of bitcoin and projects that share its philosophy is the notion of banking the unbanked, or giving financial access and empowerment to people that were left out in the cold. I always looked at this on an individual level but until recently didn’t realise it applies naturally businesses.
In Australia, financial lending has become increasing concentrated in our four main banks. At the same time, government and monetary policy has lead to a prioritisation of funding property investment and acquisition over business enterprise. This approach over several decades has made it for difficult for small businesses to gain the necessary financing to launch, grow or sustain their businesses. At the same time that interest rates in Australia (following a global trend) have been going down, the lending to small and medium enterprises (SMEs) has been declining.
SMEs play a major role in our economy. According to the Australian Bureau of Statistics (ABS) SMEs account for 99.8 per cent of all enterprises in Australia, and employ more than 7.6 million people (around a quarter of the population). This equates to about 68 per cent of the entire workforce. Despite this, SMEs are finding it more difficult to access finance through the banking system, with borrowing rates ranging at historical lows for several years. This has stifled and led to a fleeing of innovation, which has reduced opportunity for young entrepreneurs and local businesses. At a macro level, it has hollowed out our economy and made it more vulnerable to souring debt and credit supply restraints.
The experience of SMEs accessing financing is not encouraging. Some reports have shown that only 2 in 10 SMEs that apply for bank funding are successful, and only 6 percent of those rejected applicants turn to non-bank forms of lending. For borrowers that are successful, they are often required to put up their property as security. Overall, the process that they must undergo is complex and time consuming.
In this environment and based on the results of surveys, alternative financial instruments have become very popular. Initiatives such as equity crowdfunding, peer to peer lending, and invoice and balance sheet lending are now emerging in the discourse, and governments are trying to meet this need through bringing in appropriate regulatory framework.
Although alternative funding systems are necessary and meet a huge gap in financing, the reality on the ground reveals a reluctance among some businesses to utilise these options. One report in Australia showed around 83 per cent of small businesses surveyed stated that they planned on using their own funds to fuel revenue growth. This is despite those that have used alternative funding models indicating a positive experience.
The conclusion appears to be that while there is a desperate need for SMEs to have alternative financing options, there is a lack of understanding and confidence in the trustworthiness, viability and compliance qualities of these alternative models.
Innovative and decentralised options like Centrifuge would be an amazing addition to the SME funding landscape (in appropriate cases) in Australia (and I’m sure many other places) but the challenge I guess is how adoption can be strategised and how people outside of this technological space can learn to understand the benefits of this structure. I know this is something that impacts any new technology or product, and I’m sure Centrifuge already has amazing partnerships and pilots underway, but I think it’s something worth investing time in.
