The Road Less Traveled – Alternative vs Traditional Lending
Meet Ayushi, Ayushi is a 35 year old mother of 2, with a steady income and secure job working at the cash register of a store. Her character is commendable and she is often recommended by her colleagues based on her superior work ethic and integrity. Ayushi’s aim is to provide her children with opportunities she never had, especially an education that will help them be successful.Now here’s the catch, Ayushi doesn’t have any formal banking history, and burdened with her childrens fees to be paid she heads to a local pawn shop and pawns her jewellery in return for a loan that comes at a high interest rate of 40%.
Like Ayushi, there are many hardworking people out there who, due to their lack of credit history, are denied loans that could help them better their lives. Can alternative lending practises help these people who find it hard to go through tedious processes and background check only to come out failing?
What are Alternative Lending practises? Alternative lending is a collective term used to describe the broad range of loan options available to both consumers and business owners outside of a traditional bank loan.
Now there’s a plethora of different Alternative lending practises,each one popping up over the other like daisies. Below is a list of some of the most popular and used methods along with star players in the market.
P2P (or Peer to Peer) lending and borrowing is like a digital marketplace for loans. Instead of applying for a loan with a bank, or any other financial institution, you can initiate a request for a loan from individuals like you and me. This concept of P2P lending is centered around lenders getting higher interest rates by lending their money instead of putting it in savings and borrowers getting lower interest rates as opposed to getting a loan from a bank. A major player in the P2P lending market and a pioneer with seamless model is LendingClub. Closer to home, Faircent is dominating the market with a model that connects borrowers with lenders. P2P lending companies like these and other pioneers are challenging banks with their growing fan-base backed by the millennial demographic.
Similar to P2P lending, as the name suggests it’s aimed at equipping small to medium size businesses to procure the necessary monetary support to grow, from a group of online investors (institutions or individuals). This method works because it helps businesses to remove the middle men like banks who make them go through tedious paperwork. Revolutionising the B2B lending space are market disruptors like Kontomatik globally and closer to home helping B2B merchants take loans is Indifi.
This alternative lending method allows individuals to invest in early-stage private companies, that is companies that aren’t listed on the stock exchange, in exchange for equity in the said company. Equity in this manner could mean shares or a percentage of ownership of the company. Market dominators disrupting this alternative lending method are equity.indiegogo and Merchantmaverick
Invoice trading is a relatively fresh area that has been enabling small businesses to sell their invoices or receivables to many individual or institutional investors at a discount for working capital. Big players using this method of Alternative lending are Transcapital.co.uk in UK and Kredex.com in India
The list of models and companies is certainly not exhaustive; imaginative innovators are always coming up with fresh ideas on the ways to finance businesses, communities or support individual aspirations. In the near future, we may see a rapid growth of other alternative lending models with very promising representatives as the lending business is constantly evolving and attracting significant attending and investments.