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Fad Or The Future?

October 2016

Alternative lending platforms continue to gain in popularity. But is it a passing trend or the new normal?

As entrepreneurship, aided by the strides traversed in the field of technology, has boomed over the last few years, many have looked at financing options going beyond the traditional bank loan. Alternative lending companies have stepped in to capitalize on this opportunity available in helping meet more business’ lending needs.

As a report by Business Insider Intelligence estimates, only half of the small businesses (categorized as having an annual revenue between USD 100,000 – USD 1 million) received at least some of the financing they applied for from large banks in late 2015. They estimate unfulfilled loans having reached USD 96.5 billion in Q4 2015. From a market share of 4.3% in the US small business lending market in 2015, alternative lending platforms are expected to gain a 20.7% share by 2020, driven by the continued growth of new players, increased borrower awareness and interest, and most importantly, major partnerships with big banks. This bullish sentiment is echoed across markets worldwide. Alternative lending has taken on various forms world over, some of which we outline below:

Crowdfunding
According to the Massolution crowdfunding report 2015, the global crowdfunding industry has seen immense growth, in excess of 100% per annum, over the last 3 years expanded to a size estimated at USD 34.4 billion as of end 2015 from USD 2.7 bn in 2012.

While the industry has grown rapidly given favoritism from the SME sector, focus has increasingly shifted on to the legal side of the favoured crowdfunding options – equity based crowdfunding. Regulation Crowdfunding in the US is a step in this direction and the coming years are bound to see an increase in the same making the otherwise assumed ease of raising money challenging.

bluechip-chart-octnov-16P2P Business/ Consumer Lending
Peer-to-peer lending is a form of crowd-funding, used to raise loans which are paid back with interest. Interest rates on P2P platforms are linked to the risk profile of the borrower.
It is interesting to understand the perspective of this way of alternate lending’s popularity by a report from India, which has seen the central bank, the Reserve Bank of India come out with draft guidelines around P2P lending. The last couple of years have seen a host of players within the industry, some of which have been reporting business growth between 20-30%.

Invoice Trading
A newer concept, these platforms enable businesses to sell individual invoices in order to free up cash, to an online community of investors. Essentially it extends the concept of P2P lending and applies it to invoice finance. Businesses typically receive funds in their account as an advance up to 90% of the invoice face value within 24-48 hours.

These are just a handful of concepts which have come out as viable alternatives to the traditional bank lending. The appeal of alternative lending, especially in the wake of the 2008 financial crisis which led to banks increase scrutiny in the lending process, has made it a viable alternate. However, the popularity of these platforms has bought with it the risks of excesses. Here is where the last few months have seen some action around promoting transparency within the segment – US SEC’s Regulation Crowdfunding is a point in case. Experts across highlight the necessity to have central bodies to represent alternative lenders besides educating policymakers and developing a set of best practices. It would be interesting to see how the coming years see the industry formulate regulations, which could well prove the boon or bane in deciding the winners within the space of alternative lending.

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