Crypto-Backed Private Credit: A Game Changer for SMEs and Investors

Since the late 1970s, small- and medium-sized enterprises (SMEs) have leveraged private credit as a means of accessing capital when traditional banks were either unwilling or unable to meet their needs. Now, as the traditional banking sector becomes increasingly stringent in response to macroeconomic conditions, loans provided by non-bank institutions to businesses are helping to fill the gap—and the growth is palpable.

In Europe, private debt funds extended nearly 200 loans in the final quarter of 2023 alone, with the share of transactions more than doubling from 27% in 2020 to 56% in 2023. The same is true in the United States, where the private credit sector increased from $400 billion to $1 trillion in assets in just 10 years. This remarkable growth has given rise to a trillion-dollar industry, opening doors for local businesses to thrive and for investors to explore new opportunities. Amid this shift, blockchain and crypto companies are playing a transformative role, offering a more efficient and transparent path forward.

Bridging the SME Financing Gap

For SMEs, private credit is a lifeline. Historically, these businesses have had two primary funding options: attracting investors or approaching banks for loans. However, traditional banks have tightened their lending standards, leaving many SMEs without viable financing options. In fact, 24% of Euro-area SMEs have reportedly experienced severe access to finance issues, while over half of American businesses struggle to access capital. With an 18.1% decline in new lending and approval rates hovering around just 50%, SMEs are looking toward alternative sources like private credit to avoid business closures or position themselves for growth.

Private credit is also growing because these lenders provide a level of agility, flexibility, and customization that’s hard to find in the traditional banking system. SMEs often require quick funding to capitalize on new opportunities, and private lenders deliver just that—an efficient process with less bureaucracy and a quicker turnaround. At the same time, private credit providers are more open to tailoring their solutions to meet the unique needs of the business, providing SMEs with the freedom and flexibility to choose a funding structure that aligns with their specific circumstances.

This has had a huge impact on the growth and success of SMES, as 40–60% of private credit fund portfolio companies would not have been able to get traditional bank financing. But it’s not just about capital; it’s also about supporting operations, expanding businesses, developing new products and withstanding economic downturns. EY estimates that private credit supported 1.6 million jobs, contributing to $137 billion in wages and benefits and generating $224 billion for GDP in 2022.

Opportunities for Lenders

Investors can also thrive within private credit. Lenders seeking resilience, enhanced returns and diversification view private credit as an attractive option. And, with generally higher yields than traditional fixed-income investments, it’s an opportunity to boost their incremental income and safely earn interest. In fact, private credit has outperformed its public counterpart for the past decade, delivering 10% annualized returns compared to 5% for public loans.

However, the exact return potential depends on the level of risk taken. Different loans carry different types of risk, with the most important factor being the creditworthiness of a business. At Credefi, for example, all borrowers are required to provide collateral and undergo proprietary risk scoring, allowing lenders to predictably earn APY between 10% and 40% on stablecoins.

Crypto Meets Private Credit

As private credit continues to evolve, blockchain technology is playing an increasingly significant role in reshaping the industry. In fact, blockchain-based private credit has grown 127% since 2023, offering greater transparency, efficiency, and accessibility. While traditional private credit products are often associated with lengthy due diligence processes, limited liquidity, high entry barriers and complex procedures; blockchain can streamline the entire process and make it more accessible to a broader range of investors.

Credefi built its solution on the XRP Ledger (XRPL) because it offers a robust, open-source and decentralized public blockchain environment that is ideal for modern private credit funds. By enabling near-instant settlements, it reduces the time it takes to process loans and repayments, allowing capital to flow more quickly. At the same time, its transparent and immutable nature increases trust among lenders and borrowers while protecting against fraud and data tampering.

One of the most promising developments in blockchain-based private credit is the use of real-world assets (RWA) on-chain, which enable borrowers to use assets such as inventory, receivables, real estate and revenue-based financing as collateral for a loan on the blockchain. This approach is less volatile than crypto-based collateral, allowing lenders to maximize their earnings while maintaining stability and security.

Fueling the Future of Private Credit

Credefi is at the forefront of this transformation, revolutionizing the alternative lending industry for lenders and borrowers alike. By bridging the debt financing gap and unlocking access to reliable loans, it is powering the SMEs that drive the broader economy. At the same time, its RWA-backed lending solutions and partnerships with industry leaders like Experian and Armor Labs allow investors to earn APY with the highest level of security.

If you’re interested in earning passive income while supporting SMEs, connect your wallet to the Credefi platform and tap into a trillion-dollar market. With its innovative approach to private credit, they are building a future where private credit is accessible, transparent and secure for all.

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