Chinese SMEs turn to Blockchain Financing Platforms for Survival
The spread and impact of the corona virus were beyond everyone’s imagination. Enterprises were shut down, factories were shut down, and many employees were isolated at home. For many SMEs and entrepreneurs, the days after resumption of work may be more tormenting than the epidemic itself . On one hand, production is suspended and income is limited, on the other hand, various costs are just piling on top of each other. SMEs have limited savings, poor cash flow, and weak resistance to risks. They are the most vulnerable to “infection”.
Many investment agencies have called for SMEs to adhere to conservative operations in the first and second quarters of this year to reduce losses, and reminded entrepreneurs to maintain the little cash flow that they have until the end of the virus outbreak period, when operations will be back to normal, and they can spring back to life. The service industry can hardly survive the spring. Companies in the catering, takeaway, logistics, and tourism sectors have said that the pressure on cash flow is huge and they are approaching the red line of survival. According to the report of “China-Europe Business Review”, Tsinghua and Peking University jointly surveyed 995 SMEs, stating that y relying on the cash in the companies’ accounts, 67.1% of enterprises can maintain 2 months, and 85.01% of companies for 3 months, less than 10% of the companies can maintain for more than half a year. To overcome the difficulties, 22.43% of the companies plan to reduce staff and pay, 21.23% of the companies prepare to loan, 16.20% of the companies choose to suspend production and business, 13.58% of the companies will have corporate shareholders putting in more capital, and 10.16% of the companies choose private loans.
Besides saving resources, other ways SMEs can gain streams of cash is through loans and capital, and blockchain-based finance platforms have become crucially useful for the SMEs and the even smaller businesses.
Blockchain-based financing platform
The Guangzhou province is a gathering place for a variety of wholesale markets. The small and medium-sized enterprises, especially some self-employed households and small stall franchise stores, have been greatly affected by the epidemic. Due to patients confirmed with virus infection in a nearby communities, the entire seafood wholesale market is closed, and all seafood products were temporarily disposed of. This is enough to make these small stalls go bankrupt overnight. For these small stalls and individual merchants, it is impossible for them to borrow money from banks themselves, as bank loans have various thresholds and eligibility restrictions.
With the blockchain technology, the business data of small and medium-sized enterprises or individual businesses to can be uploaded to the chain and help them obtain bank loans. Their property leases, business data, geographical locations, etc. can be uploaded to the blockchain, and open this data to the government and banks, strengthen their credit scores, helping the loan department understand their operating statuses online, and allocate funds to support them.
On February 3, the General Office of the People’s Government of Beijing mentioned in the “Several Measures to Further Support the Fight against the Pneumonia Epidemic of New Coronavirus Infection” that it is necessary to build a blockchain-based supply chain claims and debts platform, providing financing services for SMEs participating in government procurement and state-owned enterprise procurement.
On February 7, Beijing’s blockchain-based supply chain claims and debts platform was officially launched. The main functions of the platform include: providing proof of account confirmation based on blockchain technology, and supporting online management of the confirmation process; supporting small and medium-sized enterprises to initiate financing needs online after obtaining the confirmation of the authorization, and launching the online loan products; supporting banks to review financing applications, credit management and loan management.
Pain points of traditional supply chain financial markets
1. Financing for SMEs in the supply chain is difficult and costly.
For the sake of risk control, banks are only willing to provide factoring business, advance payment and inventory financing to core enterprises and their first-tier suppliers, mainly relying on core companies’ ability to control cargo and regulate sales capabilities. This has led to the unmet needs of second-, third-, and N-tier suppliers or distributors with huge financing needs. While the banks are limiting the risks, they also limited the total business volume of supply chain financing services. However, because the subsequent suppliers do not get timely loans, product quality problems often occur, which can affect the entire supply chain system.
Blockchain solution:
Digital notes issued and run on the blockchain can be arbitrarily split and transferred under the circumstances of openness and transparency and multiple witnesses. This model is equivalent to making the credit in the entire business system conductive and traceable, providing financing opportunities for a large number of SMEs that could not be financed, greatly improving the efficiency and flexibility of bill circulation, and reducing the capital cost of SMEs. .
Traditional supply chain finance companies can only provide financing services to about 15% of suppliers (SMEs) in the supply chain. After the adoption of blockchain technology, the remaining 85% of suppliers can enjoy the financing convenience.
2. As the main financing tool of supply chain finance, the use of commercial bills and bank drafts at this stage is limited and the transfer is difficult.
The use of commercial bills is constrained by the credibility of the company, and it is difficult to control the arrival time of discounted bank drafts. At the same time, it will be very difficult to transfer these bonds. In actual financial operations, banks are very cautious about the legal effects of signing the transfer notice of the bonds, and require legal representatives of core enterprises to sign in person at the bank. Obviously, this method is unrealistic in the current isolation period that’s been caused by the virus outbreak.
Blockchain solution:
A alliance chain is established between the bank and the core enterprise, which is provided for use by all member companies in the supply chain. Using the multi-signature and non-tamperable characteristics of the blockchain, the bond transfer can be agreed by multiple parties and the operation is reduced.
Of course, the system design must be able to achieve the legal notice effect of bond transfers. At the same time, the bank can trace the transactions of each node and draw a visible transaction flow chart.
3. It is difficult for the supply chain financial platform or the core enterprise system to self-certify, resulting in high risk control costs on the capital side.
In the current supply chain finance business, in addition to worrying about the company’s repayment ability and willingness to repay, banks or other funds are also concerned about the authenticity of the transaction information itself, and these transaction information is recorded by the core enterprise’s ERP system.
ERP is not completely credible. Banks are worried that core companies and suppliers or distributors can collude to modify information, so they need to invest manpower and resources to verify the authenticity of transactions, which adds additional risk control costs.
Blockchain solution:
As a “trust machine”, the blockchain has the characteristics of traceability, consensus and decentralization, and the data on the blockchain is time-stamped. Even if the data of a node is modified, it cannot be hidden. Therefore, the blockchain can provide an absolutely credible environment, facilitate the rapid determination of the rights of core accounts payable, reduce the risk of intermediate links and capital risks, and solve the bank’s doubts about information tampering.
It can be said that the technical characteristics of the blockchain perfectly fit the scene of supply chain finance and provide solutions for the three major pain points of supply chain finance. This is also the fundamental reason why the integration of blockchain technology and supply chain finance has received support from the policies.
Trust and transparency are great advantages provided by the blockchain technology, which can be used in many scenarios to resolve any trust related issues and risks.
CyberVein has used the blockchain technology to build a platform for tax bureau in Shanghai. Traditionally, tax bureaus issue tax invoices to businesses based on the account documents provided by the businesses, but obviously there are problems with the traditional process as there often is tax fraud and tax evasion. The blockchain platform can help to solve the issue, where the business information is uploaded onto the chain, and it is time stamped, non-tamperable and traceable. The credibility of the information is guaranteed, and the tax bureau can further validate the information through the platform and other means. This will help to make clear what taxes the business is obliged to pay, and eliminate the chances of tax fraud, tax evasion, and being charge tax for something the business shouldn’t have or identifying subjects that are qualified for a tax refund. The platform has helped to speed up the work process, increased reliability and reduced costs incurred comparing to the traditional process. It is another way to use the blockchain technology with relations to money besides business financing.
During the period of the outbreak, many money issue will test the endurance of businesses as well as individuals, but this situation has led to the quick rise of blockchain application implementations related to money. This progress on blockchain development and blockchain implementation will certainly create momentum for the industry and hasten the realization of other projects and ideas.
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