Blockchain Brings Capital Where Banks Fear to Tread
Blockchain gives companies a way to turn routine business activities into something that catches the attention of investors.
The Gist
Access to capital for businesses often hinges on tangible assets, but many companies lack such collateral, making funding difficult.
- Institutional lenders prefer physical assets like land or buildings for loans.
- Tokenisation using blockchain technology can help businesses convert intangible assets into digital units for funding.
- Companies can raise capital against future receivables, enabling timely access to working capital.
For companies, access to capital largely depends on how tangible their assets are. Institutional lenders or investors prefer land or buildings as collateral because it’s easier to prove ownership that way.
But there are many businesses that do not have such assets. Their intrinsic value lies in daily operations, steady order flow, and regular movement of goods and services.
These activities are enough to keep a business alive, but they are of little value when these businesses go out looking for funding.
Because these assets are harder to track on paper, they are often ignored when businesses look for funding. Despite running healthy and financially sound businesses, they cannot access capital the way a traditional company with tangible assets can.
And you cannot blame financial institutions for this. Their rules do not allow them to go ahead with a loan application without assets as collateral.
So the challenge for a healthy services-led business is to show on paper the value or the potential of its intangible assets. There is a technology that can help them: it’s called tokenisation, which works on blockchain.
Blockchain creates a shareable record that shows how an asset is performing. The record of the asset, which can be seen by all participants, is then tokenised to represent economic value in small units that can be owned and transferred.
Facilitating Funds
India has around 63 million small and medium enterprises, and together they produce close to 30% of the country’s output.
Many of these businesses depend on timely payments from customers. Tokenisation allows future receivables to be converted into digital units that can be sold to investors.
That way, companies get working capital in time, and the investors receive repayments as customers pay their dues.
Instead of waiting for financial statements, investors can see payments recorded as they happen, says Atul Khekade, co-founder of XDC Network, which provides blockchain solutions for trade finance, payments, and asset tokenisation.
“Beyond receivables, assets such as logistics fleets can be tokenised and fractionalised, allowing firms to raise capital while retaining operational control, with investor returns linked to usage data tracked on-chain,” Khekade says.
Centrifuge, a Berlin-based firm, is doing something similar. It has built Tinlake, a blockchain-based system that lets businesses raise money against trade receivables.
Companies put their unpaid invoices into a Tinlake pool that classifies them on the basis of their risk profiles. Investors then fund these pools and are repaid as customers settle invoices, making capital available where banks often hesitate to lend.
That helps companies raise funds against expected income, without changing how the business is run.
The same concept applies to physical assets. A company that owns delivery vehicles, for example, can tokenise part of its fleet.
Investors earn returns linked to how often the vehicles are used, based on data recorded on the blockchain. The vehicles stay with the company and continue to operate normally.
For example, Eloop, a Vienna-based car-sharing company, tokenised part of its fleet of Teslas so that revenue from usage is shared with those who bought the tokens.
Each vehicle got a digital identity on blockchain, and people co-own parts of the fleet and earn revenue as the cars are used.
Getting More Investors
Large assets such as real estate, infrastructure projects, or business loans have usually been open only to large investors.
Tokenisation breaks these assets into smaller parts. Each part can be owned separately, making it possible to invest smaller amounts.
“For investors, tokenisation lowers entry barriers, enabling middle-class participants to invest alongside institutions in assets once limited to ultra-high-net-worth individuals,” Khekade says.
For middle-class investors, this means access to assets that earn income over time, rather than relying only on savings accounts or public markets.
Just as what JPMorgan announced a couple of months ago about its plans to tokenise one of its PE funds to make it available to all its clients.
This series is brought to you in partnership with Algorand.
