Alternative lending platforms like Lending Club and On Deck Capital are booming – and they aren’t the only ones in the game. Here’s everything you need to know about the burgeoning alternative lending sector.
Though banks have traditionally doled out loans to small businesses, alternative lenders have sprung up rapidly in recent years. See why these alternative lenders are helpful, risky, and something in between.
“Alternative lending – a broad term used to describe the wide range of loan options available to consumers and business owners outside of a traditional bank loan.” – Yahoo Small Business
The alternative lending industry totals over $1 trillion
That’s right. Trillions with a T. Venture capitalists have fallen in love with alternative lending platforms in recent years, or at least their wallets have.
According to Tech Crunch, venture investments in alternative lending startups have exploded since 2010 with investments skyrocketing to over $340 million in 2014 from $17 million in 2014.
The rise of alternative lending marks a definitive departure from an old banking model
Alternative lending offers – for lack of a better word – alternatives for entrepreneurs and startups seeking to secure loans which in today’s market may be unattainable or difficult to get.
Since the onset of the financial crisis, which tightened lending restrictions for many, alternative lending platforms have stepped in to fill a very large lending gap, and have in the process captured the attention of venture capitalists as well.
Alternative lending has attracted millennials in droves
Expectedly, alternative lending has appealed far more to younger businessmen and women than those from older generations.
According to a recent survey by Bank Of America, 14 percent of millennial business owners have opted to take advantage of alternative lending whereas only one percent of baby boomers have.
While alternative lending is growing fast, they are far from rivaling the volume of banks
Alternative lending may be growing at a tremendous pace, but they are still quite a ways off from matching small business loans by banks.
According to a Harvard Business School paper, banks still account for $700 billion in small business loans whereas alternative lending platforms supply just $10 billion.
Alternative lending has already proved to be somewhat divisive
Much of alternative lending’s criticisms are derived from the fact that they carry often steep interest rates (as much as 15 percent in some cases) and low standards in regard to granting loanees money.
Critics say that their loans’ speed and convenience, aspects which alternative lenders attract businesses with, can likewise be the reason why such companies follow somewhat shoddy lending practices.
Such lenders aren’t subject to the same regulations as a corporate bank offering a small business loan, making borrowing potentially risky.