The Coronavirus has decimated small and medium businesses across the globe. For people who want to stay in business, they might consider a way to borrow Bitcoin.
Funding your business with a bitcoin loan is an innovative and, to be fair, slightly risky solution.
But it just might work.
If you keep up with business technology news you might already be familiar with bitcoin loans. If you’re not, then this article will help you understand what they are and how they might be able to help you and your business.
DeFi - Decentralized Finance
Bitcoin loans come from a newer technology called DeFi.
DeFi stands for Decentralized Finance.
The Binance Academy defines DeFi in this way:
“Decentralized finance brings numerous benefits when compared to traditional financial services. Through the use of smart contracts and distributed systems, deploying a financial application or product becomes much less complex and secure. For instance, many dApps are being developed on top of the Ethereum blockchain, which provides reduced operational costs and lower entry barriers.
Summing up, the DeFi movement is shifting traditional financial products to the open source and decentralized world, which removes the need for intermediaries, reduces overall costs, and greatly improves security.”
Their summary gives us the most information which you might be looking for.
DeFi gives you reduced costs and improved security.
In traditional finance, when you’d be seeking a business loan, you’d need to provide quite a bit of paperwork and then wait a while.
As a business in the traditional fiat system, when you apply for a loan you need to supply your business records, credit check, statements, and other financial documents.
Then, someone will look through your loan application and manually make a decision.
This process could take days to weeks.
If you try to get funding for your business with a bitcoin loan, however, the process is far simpler.
You find a site that appeals to your terms and desired interest rates.
You sign up and deposit collateral -- usually an amount of Bitcoin or cryptocurrency or even fiat -- which is greater than the loan you need.
A smart contract processes your application and collateral and then lends you the money you need in either fiat or cryptocurrency.
You pay back that loan according to the terms you agreed to and then, once you finish paying it off, you get your collateral returned to you.
All this happens without needing someone to sign off on these transactions.
Your collateral is secured either through the DeFi platforms insurance, custodians, or other security measures.
Applying and receiving your loan can take half an hour to half a day -- depending on the cryptocurrency you use to make the collateral deposit as well as if you chose to get a crypto loan or a fiat loan.
It’s a streamlined business financing method that is shaking up the traditional banking systems.
Is Collateral Necessary?
There is one other major difference between traditional loans and bitcoin loans which you should be aware of: collateral.
The reason bitcoin loans do not ask for a credit check or need any centralized authority to sign off is because they rely on collateral.
To get a business loan through traditional financing you may not need collateral. You might just be able to rely on your good credit or the earning potential of your business.
But with a DeFi loan, you need collateral.
Usually the collateral is about 2x the amount of your loan.
Meaning that if you need a $10,000 US loan, you will need to put up $20,000 in collateralized bitcoin or crypto or fiat.
Some DeFi platforms let you put up even more as collateral in exchange for lower interest rates.
This is currently unavoidable.
So if you need a loan to fund your business but you don’t have any funds to put up as collateral, then a Bitcoin loan will not work for you.
However, if you do have funds to use as collateral, then you can use them to get a business loan.
This is especially useful for people who already own BTC or other cryptocurrencies and don’t want to sell them -- since they might believe the value of them will go up at some point in the future.
People like that can use their holdings to secure a loan and fund their business without needing to sell their cryptocurrencies.
At the end of the day, getting a DeFi bitcoin loan to fund your business depends on your needs and especially if you are willing to put up collateral.
Good luck out there!