Alternative lending is serving a gap in the lending market. It has grown drastically over the last few years as traditional banks have failed to provide financing to SMEs. What can we expect from this market?
Alternative lending, also known as alt lending, received a market boost during the pandemic due to small and medium-sized businesses being highly affected during and after that period. The challenges we constantly see are that business owners frequently don't have the credit history necessary to qualify for a loan. In other cases, businesses with a history of bankruptcy have trouble obtaining any funding from a traditional bank. Now, non-banking institutions and fintech are rapidly filling this gap by serving this subprime market.
Alternative lenders are using new technology and data analysis tools to enter a previously unexplored market by traditional banks by focusing on data to assess credit risk better; fintech and alternative lenders have gained a business advantage. Now, they can quickly identify credit risks more precisely and evaluate many factors that determine SMEs' financial health to approve loans quickly. This allows alternative lending businesses to meet the customer's demands and expectations.
Alt lenders have introduced multiple lending types, such as peer-to-peer lending, credit unions, CDFI's, fintechs, marketplace lending, and crowdfunding.
Crowdfunding is a good example of alternative funding. This type of lending uses social media and crowdfunding websites to connect investors and entrepreneurs. By enlarging the pool of investors, this alternative concept can boost entrepreneurship and offer the opportunity to test the market to assess the amount of interest a product or service receives. Like other alternative lending options, the crowdfunding market is growing tremendously.
Today, we see that due to the massive size of the SME market, alternative lenders are posing a threat to incumbent banks. Unless traditional banking institutions update their lending practices, alt lending technologies could overtake legacy processes and gain a more significant market share.
Even though traditional banks continue to dominate the market for business loans, their growth has slowed, which boosts the demand for alternative lending options.
It can be challenging for incumbent banks to digitize the lending process and adapt to the digital landscape. Some banks are already purchasing small alternative lending businesses to remain competitive. However, the long-term success of this alternative concept will largely depend on governmental regulation support and the investor community.
The uncertainty about future government regulation threatens alternative market growth and funding. Businesses in unregulated markets are still unsure about their business strategies and are testing the waters.
Want to learn more about Alternative Lending?
Join us during our upcoming meetup on Thursday, 27th of October, °neo by Five Degrees will host an interactive meetup. We've invited two industry experts, Anne Hakvoort and Ronald Kleverlaan, to discuss the future of alternative lending and answer key questions.