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Alternate lending is a fast growing industry being driven by technology and increased investment awareness. Alternate lending has shifted lending from banks and other traditional financial institutions to non-bank actors especially with the implications of a global pandemic.
Alternate finance has evolved remarkably from the peer-to-peer platforms to a diverse number of lending formats. Alternate lending has changed the rules of finance and has opened up new opportunities for small businesses. A case in point is small businesses are now accessing loans paid out in cryptocurrency.
The Alternate Financing Model
For small businesses, alternate lending is accessible, quicker, flexible and cheaper compared to taking out a bank loan. Peer-to-peer lending has been the most popular option whereby a borrower and lender interact directly on an online or offline marketplace. They will agree to their own terms and conditions eliminating the services of banks or other conventional financial institutions. As the alternate finance space expands, other lending options have emerged such as crowdfunding, merchant cash advances, and even in cryptocurrency. Most alternate loans are now funded by institutional investors who counterintuitively include mainstream banks.
Technology remains the big driver through proliferation alternate lending platforms and rise in banking-as-a-service model. Alternate lenders are making use of technologies such as big data and artificial intelligence to gather data and onboard customers. The aim is to expand reach to underserved groups such as unsecured consumers and small businesses.
An Oracle's Digital Demand in Retail Banking study across 13 countries revealed that 40% of consumers believe that non-bank actors are better able to serve their needs. Another 30% of the respondents were open to trying out alternate lenders. Alternative lending offers investors the exposure to a secular shift in the way consumers and small businesses access capital. Investors are looking to plug the $5 trillion funding gap between the financing needs of small and medium-sized businesses (SMBs) and the conventional institution-based financing.
Benefits of Alternate Lending for Small Businesses
The following are some of the benefits of alternate lending for small businesses:
Easy and Quick Access
Where traditional banks denied small business owners credit facilities, alternate lender have come in to avail the much-needed funding. Typically, bank deny access to lending based on poor credit scores and perceived lack of profitability. Alternate lenders are able to leverage technology including AI and machine learning to broaden access to financing and serve the needs of SMBs.
No Unnecessary Bureaucracy
Conventional financing is fraught with lots of bureaucracy in the form of administrative processes. The outcome is tortuous process that consumes times and resources. The alternative finance sector has taken advantage of the missed opportunities for improvement and innovation to cut the administrative bottlenecks and facilitate quicker/near instant approvals for alternate loans
Convenient Loan Terms and Repayment Times
It’s a no brainer that small businesses will always consider convenience in repayment terms and time as they seek to break even. Alternate lending options such as merchant advance loans offer convenience by basing repayment on a daily percentage of credit card sales.
Equally, it is easier for SMBs to meet alternate lending terms at lower interest rates. It’s not unusual for SMBs to bring their negotiation skills and ability to pitch ideas to the table and get favorable terms. Sheer goodwill is also prominent feature of alternate lending eliminating obstacles to financing access.
Increased Brand/Product Awareness
Alternate lending through options such as crowdfunding not only addresses financing needs for small businesses but inadvertently increases product awareness or brand awareness. Obscurity is a major challenge that small businesses face.
Crowdfunding has an online target and potential for a larger creditor base which may serve two purposes. The creditor population will become invested in the product/brand financially and emotionally. In this social media/networking age, there is just potential for increased brand awareness or product awareness. Small businesses can gain the competitive advantage with little to no investment at all.
Favorable Exit Plans
Sometimes, unfortunate situations crop up and small businesses are unable to repay a loan. Financial projections may have been overly optimistic making it impossible to continue servicing the loan.
Alternate lending offers small businesses an easier landing if they default or are completely unable to pay. With a favorable exit plan, small businesses will not end up losing everything or facing a devastating lawsuit.
Alternative lending has many benefits for both borrowers and investors. The flexibility of alternative lending is a major advantage for small businesses that can quickly and effectively access financing to facilitate business expansion and innovation. All parties involved stand to benefit and make profits in the continuously expanding alternate lending sector.