Jul 23, 2015 Sean Albert
Traditional banks cut back on lending in the aftermath of the economic crisis, which hampered small businesses' abilities to grow. To fill this void, the alternative lending sector emerged and has since established itself as an option for SMBs seeking to expedite the approval process and gain quick access to necessary capital.
But to ensure the long term viability of this industry, its constituents have had to take approaches that greatly differ from those of traditional banks. Below are some trends within the alternative lending market.
1. Encourage better decision-making among prospective borrowers
Industry expert Ken Rees wrote in an article for American Banker that lenders should hold themselves accountable for educating loan-seeking companies or individuals. While the main attraction of applying for loans from alternative sources is perhaps the simplicity and lack of hidden fees, Rees noted that, at times, the language can be confusing for consumers. This lack of transparency contributed to banks providing funding to unqualified applicants, and is something that alternative lenders need to avoid. By providing financial literacy tools to borrowers, providers can create a more intelligent lending environment and minimize risks.
2. Alternate sources use different models to assess applicants
New lenders have taken a stark departure from banks in terms of the methods they use to analyze borrowers' qualifications, according to The Huffington Post's Gina Harman. She pointed to software that analyzes a range of data without the interference of human bias as a major breakthrough for the industry. Some of the factors included in these programs are cash flow, payment history, customer transactions, industry trends and even social media engagement, Harman said. The application, approval and decision-making process can be streamlined for those who need capital immediately, and sometimes the entire operation can take place within a day.
3 . Online lending has added options and increased efficiency
Harman also noted that one of the most prominent developments among alternative lenders has been the ability to apply for and receive a loan online. In addition, the Internet has given birth to a variety of different lending services, which has given applicants more chances to be approved, even if they are rejected by traditional lenders. Technology investments have allowed online providers to offer more user-friendly and faster application processes.
Rees chimed in on the subject, remarking that small business owners have benefited from the plethora of options. Instead of being at the mercy of a select few banks, these organizations can choose from a variety of different lenders, many of whom are eager to provide capital to burgeoning businesses.
4. Alternative lenders have increased the amount of funding distributed
The sheer volume of cash being lent to SMBs and individuals has increased dramatically in recent years. Harman asserted that a vibrant and healthy marketplace has contributed to lending growth by alternative sources of 175 percent each year, according to Forbes, and, in contrast, the traditional banking sector has seen a lending decrease of 3 percent. This large spike in capital loans has opened up new doors for small businesses that may have struggled to meet the banks' requirements.