Alternative lending refers to loaning mechanisms that are detached from the usual bank-related ones. Once upon a time, all loaning activities used to be predominantly through banks. However, in the recent past, there has been an emergence of alternative lending. There continues to be a surge in the migration from bank-based borrowing to reliance on private lenders. In this article, I’m discussing why we are witnessing this surge & some of the types of alternative lending available. First off let’s look at the why:
SMEs Are A Huge Demographic
Locally the SMEs industry employs at least 60% of the nation’s workforce & contributes more than 50% of the GDP. Traditionally, SMEs have always struggled to access funding as banks consider them high risk plus their lack of collateral. So, there are two things here: the apparent importance of the SMEs industry to the economy & their difficulty in accessing funding. This is commonplace in many countries actually. It is with this in mind that people have decided to institute alternative lending options to particularly cater to small to medium enterprises.
Technology Has Made It Easy
Global alternative online lending is projected to be an industry worth at least US$200 billion by the year 2025. This is due to how easy it has become to leverage on technology to facilitate these financial transactions. In some developed countries technologies such as AI (artificial intelligence) & data analytics have made it even more accurate and faster to vet people & process their loan requests. Not too long ago Econet, through its Ecocash platforms, introduced a loaning scheme where one can access a loan by simply making the application through their mobile phone.
Flexible Regulatory Frameworks
Alternative lending isn’t riddled with many & strict regulatory issues. The bank-based regulatory requirements that one has to adhere to are quite rigorous and most people normally don’t qualify to satisfy them all. With alternative lending it’s a different experience; of course, there are some regulatory issues of sorts but they tend to be more relaxed.
Reduced Processing Periods
Relaxed regulation & less demanding due diligence processes for alternative lending makes processing time much shorter. A process that used to take as long as months before can now take a matter of minutes. The use of technology actually helps shorten the processing periods. As I said before some now use artificial intelligence and data analytics so it leads to faster & more accurate processing of loan requests.
Improved Approval Rates & Ease Of Access
In the process of requesting a loan from a bank they will need you to provide many things such as credit history, proof of prior business activity, collateral and so on. With some alternative lending platforms, those things don’t quite matter much. Much of the lending from alternative lenders is to SMEs. In the majority of cases they are startups, have never been in business before and they have financial challenges. Often times the suitability for one to qualify for alternative lending will be the potency of their business proposal. Thus, all these aspects account for high approval rates for people who approach alternative lenders. The exclusion of many demanding requirements also makes it easy for virtually anyone with a business idea to access funding.
The types of alternative lending available depend on the preferences of the lender. In most developed countries there are now established financial companies that specialize solely on alternative lending. The other significant source of alternative lending is family, relatives or friends. Let me highlight some of the types below:
Asset-Based
These are funds disbursed as a function of the worth of equipment or physical assets you own. The value is what will determine how much money you qualify for. That will be the sole requirement and will act as a safety net for funds recovery in the event that things go downhill.
Crowd-funding
These come in many various forms but some of the common ones are donations, equity or sharing arrangements. Donations entail zero repayments; equity entails one getting funding and only commencing repayment once they start making a profit. Sharing arrangements involve having written down agreements with the lender on possibly sharing the revenue or profits.
Term-Based
These are loans that can be titled short, medium or long term. There will be a predetermined repayment schedule, with regular intervals, principal repayment amounts and interest rates. All these details are deliberated on from the onset and with room for periodic reviews.
Revolving Funds
These can also be called micro-loans. This is when someone only requests funds as & when the need arises. For instance, instead of making a once-off loan request for a poultry business, one might request money at different instances depending on what need requires attention at any given time.
Invoice-Based
Suppose you are already operating a business and you are struggling financially because you have people owing your business. The money you will be eligible for from a lender will be proportional to the value of unpaid invoices. The money you are owed will be regarded as a guarantee of repayment.
In closing let me point out that alternative lending is usually characterised by very steep interest rates, though this may not always be the case. Most people turning to alternative lenders are considered high-risk and understandably so. However, alternative lending still provides the much-needed lifeline for those struggling to access funds for their businesses. Often times their business ideas are so good that they generate enough revenue to comfortably repay loans despite the high-interest rates.
