My interest in this sector maybe has come through my genes…Money lending against gold “Pandam Panayam” as it is called in our native language Malayalam, was one of the many businesses that my grandfather was into and as a small kid; I have accompanied him on several of his enterprising business actions related to this field…
However, this is just a small portion of this huge sector that has never stopped being in demand…The basics followed in this sector have still remained the same…
Loan against Collateral…
While the list of collaterals have grown and have been refined over the years let us look at how the sector is changing drastically with the incorporation of technology.
At one time or another, most small and medium-sized businesses (SMBs) have experienced the frustration of dealing with traditional financing institutions when it comes to applying for loans, whether for startup capital, refinancing, expansion, or operational needs.
The marriage of finance and technology (FinTech) is revolutionizing the loans industry. Businesses that need access to capital can now obtain alternative financing through online platforms that use technology to match lenders and borrowers.
Alternative lenders (who are typically individuals or groups of investors who are looking for high yields) are filling the void left by traditional lending institutions. Alternative financing is often referred to as Peer-to-Peer (P2P) or Business-to-Business (B2B) lending.
What Are the Advantages of Alternative Lending Options?
- Flexibility- Online platforms make it easy for borrowers to comparison shop for the best rates, terms, maturity dates, etc.
- Rapid response– Alternative financing can be obtained in as little as one day, whereas banks can take weeks or months to approve loan applications, particularly if there are issues around the evaluation of collateral. The documentation requirements for bank loans are substantially greater than for alternative financing.
- Less stringent qualification requirements – According to estimates, banks typically reject three-quarters of all small business loan requests, preferring to lend only to established businesses with solid credit ratings. Alternative lenders do not have the same requirements for lending and are consequently much more likely to extend credit to new businesses or businesses with lower (or no) credit scores. Loan approval rates from some alternative lenders are as high as 95 percent.
- Collateral – Banks are reluctant to extend financing unless the business owner has adequate business or personal assets as collateral to secure the loan. Alternative lenders are much more flexible, will often provide loans without collateral providing the business is sound, and can demonstrate the ability to make repayments.
What Types of Alternative Lending Are Available?
Business-to-Business (B2B) Lending
B2B lenders offer term loans similar to banks and other financial institutions. A typical example is Fundera, which acts as an online broker of loans. Fundera itself does not make loans; rather, it matches lenders and borrowers and charges a fee of between 1.5 to 3% of the loan amount. Term loans of up to $500,000 are available, with repayment periods ranging from one to five years. Other examples of companies that offer B2B loans include Lending Club, Prospa and OnDeck.
Equity-Based Crowdfunding
Equity-based crowdfunding platforms enable entrepreneurs and startups to raise early-stage capital in exchange for equity in the business. Shares are valued according to the total share count and the estimated valuation of the business and are issued to investors on a proportional basis. Investors may be individuals, angel investor groups, or venture capitalists. Examples of crowdfunding platforms include AngelList, CircleUp, Fundable, Localstake, MicroVentures, OurCrowd and AppsFunder.
Lines of Credit
Business lines of credit are generally used to handle temporary cash flow gaps, seasonal credit demands, emergency funding, or unexpected opportunities. Once the line of credit is established with the lender, funds can be withdrawn at any time (up to the borrowing limit) and interest owing is typically calculated based on the average daily outstanding balance. Interest rates range from 7% to 25% or more, depending on whether the business is established, the credit score, etc. Startups or businesses with poor credit scores may require collateral.
Note that proper use of a line of credit is an excellent way to build or improve a credit score. Fundera and many other online lending sites provide business lines of credit.
Invoice Financing (Also Known as Invoice Trading or Invoice Factoring)
Invoice financing allows a business to borrow amounts equivalent to a percentage of the value of outstanding invoices (up to a maximum of 95%, depending on the industry and creditworthiness of the business). The unpaid invoices serving as collateral for the loan. Invoice financing is useful for businesses who don’t wish to wait for invoices to be paid. Fees vary widely by the lender so due diligence is required. Examples of invoice financing vendors include Fundera, Platform Black, MarketInvoice, InvoiceFair, etc.
Merchant Cash Advances (MCAs)
Merchant cash advances are funds provided to businesses in exchange for a portion of future sales. Repayments are typically made via daily or weekly debits from the business bank account or credit card sales until the advance is paid in full. MCAs are typically unsecured and have less stringent qualification requirements, but are generally an option of last resort for businesses due to the high-interest rates/fees and the lack of discounts for early repayment. Examples of MCA providers include RapidAdvance, Credibly, and Fora Financial.
Personalisation ….Speed and value ads
Customers are today looking for an efficient, personalized experience in addition to speed — and one that has value — that they can complete on their mobile device and at their convenience.
The new trend is to offer more than money… Money is a commodity, so lending alone ends up being a price-based competition.
This means the most successful online lenders will offer unique benefits its target borrowers want; everything from credit cards to unique industry-specific lending structures to integrated payments offerings to any other kind of fundamental need the lender’s target borrowers share.”
Many lending tech businesses have received heavy investment over a long period of time, which has resulted in the build out of expensive tech platforms and systems. While these platforms are technologically advanced, some of them have failed to address a specific lending market need. Some lenders have also been unable to access the right pool of borrowers (due to a lack of routes to market).
The more successful platforms have focused on one or more specific financial products and industries. For example, some of the mortgage platforms have done this very well.
We are now at a point where traditional lenders, who previously rested on their established market share, have sat-up and taken notice by actually adding or changing their lending structures and lowering the cost of borrowing by collaborating with these fintech models. An example would be Barclays’ investment in MarketInvoice.
Backed by powerful data analytics, the new age fin tech companies will be competing to offer personalized lending experiences to customers, particularly to millennials, who place more value on this personal attention.”
Here are the four lending companies that made the Forbes Fintech 50 in 2019 and in an industry that hasn’t historically attracted female leaders, three of these companies — Kabbage, Nova Credit and Tala — are cofounded by women.
1. Affirm – San Francisco
Makes instant three to 24-month point-of-sale loans to finance purchases from 2,000 online merchants, including Wayfair, Casper and Expedia. Longer 36- and 39-month loans are available for larger purchases. Annual interest rate (APR) varies between 10% and 30%, based on customer credit history, with some sellers (including Warby Parker and Nest) subsidizing 0% APR rates. Charges no late or prepayment fees.
Funding: $450 million from Khosla Ventures, Lightspeed Venture Partners, Founders Fund & others. Latest valuation: $1.8 billion as of December 2017, according to Pitchbook.
2. Kabbage – Atlanta
Provides lines of credit to small businesses, with online approval, often in minutes. Automated credit decisions are based on extensive alternative data—including a business’ shipping and even social history—as well as bank records. In addition to making loans with its bank partner, Kabbage has licensed its technology to such big banks as ING and Santander.
Funding: $489 million from SoftBank Vision Fund, BlueRun Ventures, Mohr Davidow Ventures & others. Latest valuation: $1.2 billion, according to Pitchbook.
Bona fides: Has made $6 billion in loans to more than 150,000 small businesses.
3. Nova Credit – San Francisco
Integrates and standardizes information from credit reporting bureaus in India, Mexico, the U.K., Canada and other countries so that U.S. lenders and landlords can serve immigrants who lack a U.S. credit record. In addition to reporting their foreign payment history, Nova creates a “Credit Passport” number for newcomers similar to a FICO credit score.
Funding: $20 million from General Catalyst, Index Ventures, and First Round.
4. Tala -Santa Monica, California
Makes microloans of $10 to $500 to borrowers in developing countries by crunching data from their smartphones (including merchant transactions, app usage, texts and calls) to judge if they’re credit worthy. More than 85% of approved customers receive credit in less than 10 minutes.
Funding: $105 million from IVP, Revolution Growth, Lowercase Capital and others, plus an undisclosed investment from PayPal
As data analytics develops further and with the smartphone becoming the instrument of choice for the millennial, the alternate funding industry will evolve further and keep eating into more of the traditional lending space.
Nevertheless, more than this, it is also bringing about new sectors that never existed…The other day when I was ordering foodstuff on a popular platform I was offered an interest free loan until the end of the month without any security on the spot…
In addition as things are quickly becoming more personalized, immediate, cross-platform, and transparent this space is expected to grow substantially ….
My grandfather would have loved to have lived in this era … guess I have to carry on the tradition of looking at all these new options…
