FinTech Terms Explained: Alternative Lending
In recent years, the growth of financial technology (FinTech) has transformed the lending industry. Alternative lending is a subsector of the FinTech industry that has particularly taken off, offering a variety of differentiated lending products to borrowers. In this article, we will examine the definition and evolution of alternative lending, as well as the types of alternative lending available and their benefits.
Understanding Alternative Lending
Definition and Overview
Alternative lending refers to any non-bank lending activity that takes place outside the traditional banking system. This typically involves the use of technology to match investors with borrowers, bypassing traditional financial intermediaries such as banks.
Alternative lending platforms offer a range of lending products to borrowers, from short-term working capital loans to long-term small business loans. Unlike traditional banks, which focus on credit scores and collateral, alternative lenders often use alternative data sources and algorithms to determine creditworthiness.
Alternative lending has become increasingly popular in recent years, with many small business owners turning to these platforms for financing. This is due in part to the fact that alternative lenders are often more flexible than traditional banks, offering faster approval times and more personalized service.
The Evolution of Alternative Lending
Alternative lending has grown significantly in recent years, fueled by a combination of low interest rates, increasing demand for credit, and the emergence of new technologies. Initially, alternative lending was focused on peer-to-peer (P2P) lending, which involved matching individual investors with borrowers. However, the market has evolved considerably since then, with a range of new lending products and platforms emerging.
One of the biggest trends in alternative lending is the rise of marketplace lending. This involves connecting borrowers with a network of investors who are willing to fund their loans. Marketplace lending platforms typically use sophisticated algorithms to match borrowers with investors, and they often offer a wider range of loan products than traditional banks.
Another trend in alternative lending is the use of blockchain technology. Blockchain is a distributed ledger technology that allows for secure, transparent transactions without the need for intermediaries. This has the potential to revolutionize the lending industry by reducing costs and increasing transparency.
Key Players in the Industry
There are numerous players in the alternative lending space. Some operate globally, while others are focused on specific regions or sectors. Some of the key players in the industry include:
LendingClub: LendingClub is one of the largest marketplace lending platforms in the world. It offers a range of loan products, including personal loans, business loans, and auto refinancing loans.
OnDeck: OnDeck is a leading provider of small business loans. It uses a proprietary credit scoring system to determine creditworthiness and offers loans up to $500,000.
Kabbage: Kabbage is a technology-driven lender that specializes in small business loans. It offers lines of credit up to $250,000 and uses a range of data sources to determine creditworthiness.
Funding Circle: Funding Circle is a global marketplace lending platform that focuses on small business loans. It offers loans up to $500,000 and uses a proprietary credit assessment system to determine creditworthiness.
Prosper: Prosper is a peer-to-peer lending platform that connects borrowers with individual investors. It offers personal loans up to $40,000 and uses a proprietary credit scoring system to determine creditworthiness.
Overall, alternative lending has emerged as a viable alternative to traditional bank lending. With its focus on technology and innovation, it has the potential to transform the lending industry and provide greater access to credit for small businesses and individuals alike.
Types of Alternative Lending
Alternative lending is a growing industry that offers a variety of financing options for individuals and businesses. These lending options are typically more flexible and accessible than traditional bank loans. Here are some of the most common types of alternative lending:
Peer-to-Peer (P2P) Lending
P2P lending is a popular type of alternative lending that allows investors to lend money directly to borrowers through an online platform. This type of lending has become increasingly popular in recent years, with platforms such as LendingClub and Prosper leading the way. P2P lending offers investors the opportunity to choose the borrowers they wish to lend to, and receive regular repayments. This type of lending can be an attractive option for borrowers who have difficulty obtaining traditional bank loans.
Crowdfunding
Crowdfunding is another popular form of alternative finance that allows businesses to raise money from a large number of investors, typically through an online platform. Crowdfunding can be equity-based, debt-based, or reward-based, and has become a popular way for new businesses to raise capital and launch new products. Crowdfunding offers investors the opportunity to invest in innovative new businesses, while also providing entrepreneurs with access to much-needed capital.
Invoice Financing
Invoice financing is a type of alternative lending that allows businesses to borrow against their outstanding invoices. This type of lending can be attractive for businesses with unpaid invoices, as it enables them to access funds quickly and without the need for collateral. Invoice financing can be a useful tool for businesses that need to manage their cash flow, as it allows them to access funds that they are owed but have not yet received.
Merchant Cash Advances
Merchant cash advances are a type of alternative lending that allows businesses to borrow against their future revenue. This type of lending is typically used by businesses that have trouble obtaining traditional forms of financing. Merchant cash advances can be an attractive option for businesses that need access to capital quickly, as they can often be approved and funded within a matter of days.
Microloans
Microloans are small loans that are typically used by entrepreneurs and small businesses. They are offered by alternative lending platforms and often feature more flexible terms than traditional bank loans. Microloans can be an attractive option for businesses that need access to capital but do not meet the strict requirements of traditional bank loans. Microloans can be used for a variety of purposes, including working capital, inventory purchases, and equipment financing.
Overall, alternative lending offers a range of financing options for individuals and businesses that may not qualify for traditional bank loans. Whether you need access to capital quickly or are looking for more flexible lending terms, alternative lending may be the right choice for you.
Benefits of Alternative Lending
Faster Approval Process
One of the key benefits of alternative lending is the speed at which loans can be approved. Unlike traditional bank loans, which can take weeks or months to process, alternative lenders often provide approvals in a matter of days or even hours.
Lower Interest Rates
Another benefit of alternative lending is the potentially lower interest rates. Lenders in the alternative lending space are often smaller and more nimble than traditional banks, enabling them to offer more competitive rates and more flexible terms.
Flexibility and Customization
Alternative lending platforms often offer more personalized and customized lending solutions than traditional banks. This can be particularly attractive to small businesses and entrepreneurs, who may have unique borrowing needs.
Access to Capital for Small Businesses
Perhaps the biggest advantage of alternative lending is the increased availability of capital for small businesses. Traditional banks have historically been reluctant to lend to small businesses, and alternative lending platforms have helped to fill this gap in the market.
Overall, alternative lending represents an exciting and rapidly evolving sector of the FinTech industry. With its potential for increased speed, flexibility, and access to capital, alternative lending is helping to shape the future of lending and finance as we know it.