Bonded loans – a well-established type of financing in the commercial lending area – are a common approach to finance strategic growth initiatives or larger investments. Although many finance organizations are stepping up efforts to digitalize and automate processes, speed time to market, and deliver value-driven services in real time, processes for bonded loans have been, for the most part, untouched. But all of this is changing as lenders and investors start to consider the new possibilities for distributed ledger technology (DLT), which is commonly associated with blockchain.

Currently, approval and issuance of bonded loans follow a highly manual and paper-based process:

According to Deloitte and SAP, connecting networks based on DLT with ERP or other back-office systems could “unlock the true potential of the technology for corporations.” In its whitepaper “Connecting the Dots: Deriving Business Value from Blockchain Technology Through Integration with SAP Solutions,” coauthored by SAP, it mentioned that this approach will likely eliminate the drawbacks of bonded lending to open up a €75 billion (US$90 billion) loans market and new business models.

Could this be the last step to achieving the age-old dream of a paperless finance function within the next five to 10 years?

Blockchain for corporate lending: More than just cryptocurrency

Whenever the word “blockchain” comes up, most people immediately think of Bitcoin. But there is much more to it. “In the digital world, a speedy approach in close collaboration with our customers and partners is essential,” said Jürgen Müller, chief innovation officer of SAP, in a recent interview. “With blockchain as a service, we provide the possibility for an open collaboration in divided enterprise processes via peer-to-peer networks.”

As a distributed system, blockchain records and stores a chain of transactions in a shared and immutable peer-to-peer environment that is created through linked transaction blocks and a digital ledger. Reliance on established crypto-techniques enables all parties of a bonded loan program to interact with a trusted network without establishing a preexisting relationship.

The entire loan process becomes simpler, faster, highly transparent, and eases compliance, thanks to the elimination of:

  • Manual steps
  • High volumes of paper
  • Limited transparency of ownership changes
  • Slow-moving, disjointed communication and information exchange
  • A central authority that owns the entire process

Every action and decision is visible and verified by all participants in the blockchain – all in real time. Because the loan is digitalized, there is greater speed in how the loan is granted and managed until repayment, while increasing trust that the network’s investment is sound and compliant.

By forming a viable means of collaboration between network members and audit trail management, blockchain is shedding its Bitcoin reputation to emerge as a fundamental element of the paperless finance function. A blockchain-backed bonded loan allows businesses to borrow faster and cheaper, with transparent information about bonded loan transactions as well as investors.