Traditional loans can be a hassle with all the prerequisites involved. Many business owners have testified that accessing financing can be close to impossible, which is why alternative lending has come as a boon.
Likewise, alternative Lending in Australia is growing, as proved by its valuation of $1.13 billion. With this boom in business, it’s crucial to know what it is and how it works.
What Is Alternative Lending?
Alternative lending is a large umbrella that includes any lend-borrow transactions that fall outside traditional banking. Different types of alternative lending fall under this umbrella. They comprise loans such as direct peer-to-peer loans, debt financing, and equity financing.
Alternative lenders have flexible and accessible loans, which allow more small businesses to succeed and thrive.
How Does Alternative Lending Work?
Alternative lending uses online platforms to bring loan investors and borrowers together. The models speed up the underwriting process to determine the credit risk of the consumer. Essentially, these platforms maintain the relationship between customers and loan investors. They act as servicers by sending cash flows from the investor to the borrower, apart from the net service fees.
Alternative lending also doesn’t utilize funds to maintain a physical building and other associated expenditures. This cost cut gives them enough space to focus on streamlining processes while investing in other small businesses, which may be too risky for traditional banks.
The Evolution of Alternative Lending Schemes
One noticed this form of alternative loans first, in the United Kingdom and the United States, where there was underwriting of small amounts in 2005-2006. These were direct peer-to-peer transactions online, and the Global Financial Crisis then only fueled its growth.
These funding models eventually evolved from p2p to the predominant investors being institutional buyers. Presently, there are more than a few models available for consumers.
The Advantages of Alternative Lending
There are several benefits that this form of lending brings to the table. These advantages include simple application submissions and a faster approval period. The terms for underwriting are flexible, making this widely accessible.
Apart from traditional loans that come with an interest rate of 7 to 30 percent, one can also opt for merchant cash advances and short-term loans that can be more expensive. They tailor these loans to suit specific needs, and that versatility is necessary for the success of small businesses.
Types of Alternative Lending
Direct Lending
These loans are the most widely used and the most popular service in alternative lending in Australia. They work similarly to bank loans without the involvement of a bank. Institutions offer loans to small businesses, entrepreneurs, and even other investors. These are people who typically might not qualify for a bank loan, and, through this, alternative lending can bridge the gap left in the market. In this manner, businesses and investors receive opportunities to grow and succeed.
Venture Debt
Venture debt provides the perfect alternative for companies who need to raise money for a specific venture (a round of venture capital financing) but do not wish to lose more equity to investors. However, if a company cannot repay a venture loan, it could lead to bankruptcy and repossession.
Debt Financing
It is a simple transaction with the lender agreeing to pay an equivalent sum, along with interest, at a particular date.
Different types depend on how these repayments are made and received.
Alternative lending has provided an opportunity for those to whom the banks are inaccessible. While looking for a suitable service, remember to compare and look for better rates. Never settle, and happy investing or borrowing!
