What is Alternative Lending?

Often, individuals and small businesses alike need funding in order to improve some aspect of life or work, and many times, they feel that they’re at a disadvantage when it comes to seeking financial help from a traditional bank.

Fortunately, alternative lending exists for this very reason and has become a popular option for those who seek to borrow in a way that closely fits their needs.

What Is Alternative Lending?

Alternative lending or marketplace lending is a type of lending process that does not rely on traditional banks. Instead, lending is done in a peer-to-peer (P2P) sort of way, and it typically takes place through lending platforms online. Most of the time, alternative lending is ideal for individuals who are not deemed lending candidates by traditional banks, and the process of lending between peers tends to be less complicated than standard lending practices. 

In many cases, alternative lending is done for small businesses, student loans, automotive financing, and other lending needs that go beyond standard credit or payday loan needs.

Types of Alternative Lending

Alternative lending has introduced an array of new lending sub-types that are ideal for both small businesses and individuals. This type of lending presents a variety of financing options that prove difficult to obtain through traditional banks. While there is an array of diverse lending options, some of the most common forms of alternative lending are as follows:

• Lines of Credit: Lines of credit are specific sums of money that a lender offers a borrower, much like lines of credit from a bank. Borrowers can draw from their line of credit under and up to the fixed sum they’re approved for. In turn, they repay the sum with interest added on.

• Short-term Loans: Short-term loans are typically expected to be paid in full within a year’s time. They’re virtually unheard of with traditional banks and can be very useful for a small business that seeks quick money to cover sudden costs.
• Installment Loans: Installment loans are a lump sum loan that the borrower repays at regular intervals until the sum has been paid in full. Typically, paying back the loan is done through a fixed monthly fee, with little to no rate fluctuation throughout the life of the loan. 
• Merchant Cash Advances: This type of loan is ideal for small businesses that need quick cash. In exchange for future credit card sales, merchant cash advance lenders offer borrowers a specific sum of money which must be paid back with a portion of the company’s credit card revenue.
• Microloans: Microloans are low-value loans of typically less than $50,000. Because traditional banks prefer to lend large sums of money, alternative lenders carved out a niche in the small business world by offering smaller, simpler loans to individuals and businesses that do not want to be tied down with expensive loans they don’t need. Repayment terms for microloans tend to be much shorter than standard lending terms as well.
• Equipment Financing: These loans are designed for small businesses that need to purchase equipment in order to keep the company in operation. Because business equipment can be expensive when purchased alone, alternative lenders offer businesses the funds they need to obtain the necessary equipment. The equipment becomes collateral and because of this, payback rates are typically lower than standard lending.

Alternative Lending Pros and Cons

Like with any form of lending, there are benefits and risks associated with alternative lending that borrowers need to consider before making a decision. 

PROS:

• Alternative lending technologies allow borrowers to receive the funds they need in less time than it takes to complete standard lending processes. In many cases, it takes only a single day to apply and be approved for an alternative lending route.
• Lenders are able to provide a wider variety of loan options so that borrowers are more able to seek out products that closely fit their needs.
• Alternative lending sees much higher approval rates than traditional lending practices, with over half of applicants being approved for funding with alternative lenders, compared to only ⅕ of traditional lending approval.

CONS:

• Interest rates through alternative lenders tend to be higher than interest rates offered through traditional lending means. This is due to the fact that alternative lenders need to minimize their lending risks.
• Alternative lenders usually offer smaller loans with shorter repayment terms, meaning that they expect repayment sooner than traditional banks do.
• Traditional banks have established reputations for themselves as credible lenders, which may not be the same story when it comes to alternative lenders. One alternative lender is not the same as the next, so it’s important for borrowers to practice due diligence before deciding to trust a specific lender.

While alternative lending is not ideal for every situation, it has successfully gotten borrowers in touch with lenders who seek to provide a wider array of services and assist individuals and businesses that have been turned away by traditional institutions. It’s still highly important to conduct research and carefully weigh options before making big financial decisions, however, alternative lending may very well be the option that best fits a specific financial need.