Sunday, 22 July 2018

Information and commentary for the small business banking industry

Is alternative lending the way forward for SMEs?

With the advent of alternative lending options for small businesses, banks need to look outside the square and consider co-funding or working with other lenders.

The growth of alternative lending

The rise of alternative lending has been one of the biggest trends affecting small businesses and traditional moneylenders. Here are a few sources of alternative business loans that have emerged recently.

Crowdfunding sites

Described as ‘democratic finance’, crowdfunding is particularly useful for younger entrepreneurs and potential small business owners with ideas that aren’t bankable in the minds of traditional lenders.

Crowdfunding sites have even saved a few businesses with their model of asking a large number of individuals to finance an idea. The risk to any one funder is reduced and finance can be raised quickly.

Crowdfunding has found its place in the marketplace, but are there opportunities for banks to get involved with reputable crowdfunding sites, to help fund start ups looking for finance?

For the banking industry, crowdfunding might be a way of sharing and learning to manage risk, while promoting ethical and local investments. For example, banks could offer to finance 50% of a local business with the remaining funds coming from investors through a crowdfunding site.

Non-bank lenders

With current low interest rates, and banks and other traditional lenders making life difficult for some small business owners to get loans, alternative non-bank lenders like Kabbage are booming.

There may well be certain types of loans that can be better handled by alternative lenders. Can banks work together with some of these smaller lenders to help partially fund small business start ups looking for other options?

According to a recent study*, 70% of business owners bootstrap and fund their new businesses from their own pockets. However, the current trend is shifting towards more SMEs looking for alternative solutions to traditional options.

The peer-to-peer model

The peer-to-peer (P2P) model is already established in consumer lending, with companies like Lending Club and Prosper making billions of dollars in consumer loans.

P2P lending is an option for raising capital that was made possible by the Internet. It’s essentially a hybrid of marketplace lending and crowdfunding.

How can traditional banks play a role in P2P lending? They could possibly offer the legal and regulatory framework for P2P lending start ups, or use their existing customer base to create their own P2P lending marketplace.

* Success and failure statistics of startups

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