For traditional banks, the lending process, involving assessment of factors like creditworthiness and risk profile of any potential creditors with high accuracy, is a complex process. The issues only add up when a small businessman or a merchant seeks a loan to either run an ongoing business or to fund a startup. At the same time, merchants face the brunt of a bad credit score and at times are borrowing for the first time, thus lacking any credible history. As a result, most of the time, small business firms are bogged down by a denied loan application.
In light of these shortcomings, non-banks and alternative lending platforms have entered the banking landscape, threatening the incumbent banks and challenging the lengthy loan protocols that are followed. These alternative platforms leverage technology to do credit profiling and offer quick loans whenever needed. This has, in fact, helped merchants with bad credit scores get the best small loans.
Introduction to Alternative Lending
Alternative lending is a medium of getting funds outside of a traditional bank. These non-banking financial institutions lack a full banking license but offer differentiated lending options to merchants and business loan seekers. It can either be a physical organization or an online platform typically engaged in offering customer-specific loans.
How Alternative Lending Works
Online alternative lending platforms work on the concept of alternate credit decisions (ACD), which involves using unconventional channels of consumer information like social media and another retail website to make a consumer credit profile. Some of the critical information accumulated through this process includes address, bill payment history of utility services or telecom, social media profiles like Facebook and LinkedIn, apart from other data filed through online forms.
This raw data coupled with a good credit score is used to analyze the creditor’s profile and make a judgment.
Key Alternative Lending Platforms
SoFi: SoFi is an America-based online personal finance company that initially started to refinance student loans at competitive rates which are low, fixed and variable. Later, the company expanded and started mortgage funding besides other funding products such as personal loans and medical refinance facilities. Apart from this, the platform also offers career coaching to students without any cost. The company has also recently announced the launch of crypto-trading platforms with digital assets like Bitcoin and Ethereum. Meanwhile, the platform is expanding further and changing from a desktop-based online platform to mobile-based lending.
Quicken Loans: This is another online mortgage lending company which is popular for its Rocket Mortgage application that offers disbursal of loans within 10 minutes. Post applying online, the application offers custom products with recommendations based on customer needs with real interest rates and payments.
PayPal: It is a peer-to-peer lending service that enables authenticating existing bank accounts onto the platform. The application is both accessible on a computer as well as mobile and enables users to send and receive funds directly into their accounts. It also offers small business loans for working capital needs, which are disbursed based on the sales history of the businessmen.
Kabbage: It is an Atlanta-based online lending facility that offers a new and automated method for small businesses to access working capital loans. Loans ranging between $2,000 and $2,50,000 carrying an interest rate of 1.5% to 10% can be availed. These loans have a short repayment period ranging between 6, 12 and 18 months. Another key feature of the facility is that through a business line of credit facility loans can be withdrawn till the limit is exhausted.
The alternative lending market is an expanding market and is poised to grow manyfold given the limitations of traditional banks. In May 2019, SoFi raised funds worth over USD 500 million from Qatar Investment Authority and from other authorities as well. Recently, PayPal introduced working capital loans ranging from USD 5,000 to USD 10,000 in Canada. Apart from this, another platform called Kabbage has secured USD 200 million to launch its artificial-intelligence-based loan application called SoftBank. With these compelling facts, the alternative lending market is set to grow further and might take the small lending industry to a new level.