Is a Cryptocurrency Loan Right for Your Small Business? | sbeinc.com

07/09/2021

Cryptocurrency loans are a way to borrow cash using Bitcoin or other cryptocurrencies as collateral. These loans do not require a credit check or that you have a good credit score. There are several types of crypto loans like DeFi, CeFi, or SALT loans.

What Is Cryptocurrency?

Cryptocurrency is a digital form of currency. These coins (also called “tokens”) do not exist in paper form like the money we are used to spending. They are not held in our hands or kept in our pockets. Instead, they are stored on a blockchain (an encrypted digital ledger) and kept in a digital wallet.
 
Cryptocurrencies are a legitimate form of money only at places that will accept that specific form of cryptocurrency. Most cryptocurrencies are not controlled by a government or a central bank.
 
One advantage of cryptos is that it is almost impossible to counterfeit them because of blockchain technology.
 
At this time, there are over 10,000 different cryptocurrencies. The most popular tokens, ranked by market capitalization, include:

• Bitcoin
• Ethereum
• Tether
• Binance Coin
• Cardano

What Is a Crypto Loan?

There is an old saying about getting your money to work for you instead of the other way around. Usually, this means investing money in dividend-paying stocks or in accounts that pay interest. However, if you invest in cryptocurrencies, they do not pay a dividend and they do not gain interest. Most crypto owners are holding their coins for long-term gains.
 
A crypto loan is a way for those that hold crypto to make their coins work for them. For example, if someone owns Bitcoin and needs money, they can use their Bitcoin as collateral for a cryptocurrency loan paid out in dollars. They get their Bitcoin back once the loan is paid off. This way, the borrower gets access to cash while being able to keep their Bitcoins.
 
One advantage of a crypto loan is that it usually doesn’t require a credit check. This is an advantage to those with less than a stellar credit rating or a short credit history.‍
 
Since a loan is collateralized with the cryptos you own, the borrower may be able to get a lower interest rate on the loan compared to an unsecured cash loan. However, because of the volatility of cryptocurrencies, if the underlying crypto falls too much in price, the borrower might have to put up more crypto to cover the loss.
 
There are several options to get a crypto loan via centralized financing (CeFi) or decentralized financing (DeFi).

CeFi: Traditional Bank Loans

With a CeFi loan, borrowers must register and provide information required by Know Your Customer (KYC) regulations. CeFi platforms (eg, banks) must follow specific laws and documentation to remain compliant. These laws are designed to prevent money laundering and fraud. Protocols keep the collateral safe such as cold storage or away from an internet connection.

DeFi: Crypto Loans

DeFi lending is decentralized, with all transactions recorded and encrypted on a digital ledger. Some of these DeFi lending platforms use protocols and algorithms that automate loan payments.
 
Unlike borrowing on a CeFi platform, there are no middlemen or financial regulators involved with DeFi lending and borrowers do not have to go through a KYC verification process. Because of this, interest rates for crypto loans on DeFi platforms pale in comparison with the rates CeFi offers.
 
Getting a crypto loan on a DeFi platform is quick. Because of digital “smart contracts,” borrowers only need to apply for the loan and send in the crypto for collateral to a specified digital wallet.

What’s a SALT Loan?

SALT stands for Secured Automated Lending Technology. SALT loans provide a method for borrowers to use their cryptocurrencies to get loans using SALT lending platforms.
 
Borrowers buy a membership to the platform by buying a SALT token, which is the SALT platform's cryptocurrency. Once a member, they can borrow money from a large network of lenders. There is a minimum loan amount of $5,000.
 
A SALT loan is similar to a CeFi loan. Clients must pass Anti-Money Laundering (AML) and KYC checks. However, applying for a SALT loan does not affect a credit score and does not appear on a credit report.

Is a Crypto Loan a Good Idea for Small Businesses?

A crypto loan could be a good idea for businesses that need a quick influx of cash for repairs, to buy equipment or any other business reason. If a business owner has a poor credit rating and needs to take out a loan, a crypto loan would be a good idea if they own valuable crypto assets.
 
One reason a business might not use crypto loans is that they have an excellent credit rating and can get regular lines of credit from banks. Another reason not to use a crypto loan would be a business that does not want to risk losing their cryptocurrencies in case of default on the loan.

Summary

A cryptocurrency loan is a way to use cryptocurrencies as collateral, while maintaining ownership of the cryptocurrency.
 
Cryptocurrency loans are a good way for businesses to get a loan if their credit rating is not very good or they have a short credit history. Cryptocurrency loans sometimes incur a lower interest rate than a bank would charge. Crypto loans do not require a credit check, and these loans can often be processed on the same day.