How to use crypto as collateral for your business loan

• Cryptocurrency (or cryptocurrency) has become increasingly popular with investors and even as an accepted form of payment with businesses around the world.
• As it gains popularity, crypto lenders are becoming more common as an alternative source of small business and personal loans.
• Find out more about crypto loans and the rise of digital currencies from Nav’s small business experts.

What are crypto loans?

Crypto lending (or crypto lending) is the process of using cryptocurrency, such as Bitcoin (BTC), as collateral, as you would with a secured loan. It is a decentralized financial service (or DeFi) that uses the blockchain to lend crypto assets to borrowers and then earn crypto interest. For a crypto-lender, it can be compared to opening a high-yield savings bank account, where you earn interest on the money in the account, but use cryptocurrency instead.

It sounds simple and like a lot, but because digital currencies are still new and the crypto market is not necessarily always stable, it is not common for traditional lenders to participate in crypto loans yet. However, crypto lending is quickly becoming one of the most popular DeFi services on cryptocurrency platforms and exchanges.

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How do crypto loans work?

With crypto loans, lenders and borrowers use a crypto platform or exchange as a lending marketplace. Both will register on the platform with their digital wallets. To engage in crypto lending, a crypto borrower will move their cryptocurrency from their digital wallet, or crypto wallet, to a high-interest lending account on the platform. Borrowers can then apply for crypto loans through the platform, which will approve the borrower and set interest rates and fees. The loan will be paid for using funds from the crypto countries’ accounts. As the borrower repays the loan through monthly payments, the cryptolender and the platform will collect the interest.

Each platform will have its own interest rates and fees. Lenders can earn a higher annual percentage rate of return (APY) if they are willing to keep their cryptocurrency locked in the account for a certain amount of time without making withdrawals, giving the platform more access to the funds for lending purposes.

There are also automated methods of crypto loans. In this scenario, borrowers and lenders simply link their digital wallets to a centralized lending protocol that handles approvals and transfers based on certain conditions being met. These conditions are called smart contracts, and they consist of code running on blockchain networks that automatically determine when a loan can be approved.

Advantages and disadvantages of using crypto as security

As with all financing, there are risks associated with crypto loans. There are also advantages and disadvantages:

Benefits

Is Crypto Security Good for Bad Credit?

One of the reasons why crypto loans are popular is because they do not require a credit check like more traditional forms of financing such as a personal loan or business loan. This means that borrowers who have a less than stellar credit score can borrow through crypto loans. This can be especially tempting for entrepreneurs who are looking for small business startup loans because they don’t have a business history or business credit score yet.

But even in crypto loans, having a bad credit score can make borrowers more likely to fall prey to high interest rates and short-term repayment agreements. It’s a good idea to learn how to establish business credit and improve it over time, especially if you’re interested in small business loans. You can also look into business credit cards to help you pay for business expenses and build your credit over time.

The risk of crypto loans

Crypto loans come with a number of risks.

• Volatility – Cryptocurrencies are known to have huge price increases and decreases depending on the whims of the market. Because of this volatility, they are considered less stable than other currencies, and this can make your loan complicated.
• Counterparty Credit Risk for Lenders — There is a chance in any lending scenario that the borrower will default on the loan and not be able to make their final payments, but it is especially high with crypto loans.
• Platform Insolvency – Due to the volatility that we mentioned above, cryptocurrency platforms can go bankrupt at higher rates than FDIC-insured banks and traditional lenders. It is unlikely that the lender or borrower will be able to get the money back if a platform goes bankrupt, either.
• Security Issues and Cyber ​​Attacks — Because cryptocurrency is managed entirely through digital means, it is a prime target for hackers. The most popular currencies, such as Bitcoin and Ethereum (ETH), are often vulnerable to outside cyber security attacks. Also, newer cryptocurrencies may not have as strong security features for your digital assets, putting you at risk.
• Technology errors with smart contracts — New technology often has many kinks to work out, and smart contracts are prone to coding errors if put together quickly or unregulated. This can lead to errors similar to banking errors, such as too much money being deposited into or withdrawn from your account.
• Unclear regulations — Laws and regulations are still being written around cryptoloans and cryptocurrency in general. It’s a bit like the Wild West, and because the legal issues aren’t clear, it can mean you won’t have much recourse if things go wrong.

Best Crypto Lending Platforms

Because crypto lending is new and still evolving, it’s hard to say which platforms are proven. However, there are certain standards you can use when looking for a good crypto lender, including:

• Good security (such as encryption)
• Lower interest rates and fees for borrowers
• Flexible loan term
• Support for multiple currencies (eg for both BTC and ETH)
• Low risk of platform insolvency
• Deposit limits (for lenders)

Here are some cryptocurrencies that meet these criteria:

As always, check with each lender for loan terms and conditions and, in the case of cryptocurrency and crypto loans, read up on the platform to make sure they’re not in hot water.
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