March 16, 2016
Alternative lending companies almost took over the lending business by storm, leaving few options to major players. Realizing the possible loss in a race for the profitable service, banks have joined hands with alternative lenders and even saw a great opportunity in financially fueling the loans originated by competitors.
While we look at the alternative lending as a whole segment, it actually is a complex ecosystem consisting of eight types of alternative lending businesses.
The best-known type so far is P2P lending. There is a wide range of companies successfully operating in a subsegment to democratize lending. P2P lending is built as a marketplace where individual borrowers take unsecured loans from other individuals. The model allows individuals to access low-cost quick loans at a rate they can afford.
Reward-based crowdfunding offers businesses and individuals an opportunity to score early-stage investment, presell products, obtain market validation and social proof, crowdsource creative ideas, engage customers, secure partnerships and build loyal communities.
Reward-based crowdfunding originated in Europe but went much further and got adopted across continents. Some of the companies leveraging the model are Crowdtilt, TechMoola, Springboard, Kickstarter, RocketHub, iPledg, FunderThunder, etc.
B2B lending is similar to P2P lending but aimed for businesses. It enables SMEs to receive the necessary funding for growth directly from a set of online investors (both individual and institutional). The advantage of this model is that it allows businesses to cut the intermediaries like banks with complex and time-consuming paperwork time. In addition, just like P2P lending for individuals, B2B lending offers competitive rates and terms of financing along with transparency and ease of use.
Equity-based crowdfunding is a fast-growing subsegment. The model enables entrepreneurs and startups to raise early-stage capital in an online marketplace directly from individual investors, angel investors and VCs in barter for equity in the company.
Equity-based crowdfunding has a positive effect on cross-border relationships between companies as investors can get access to the businesses abroad and oversee foreign business operations from the inside.
Community shares and Microfinance
This type of alternative lending entities focuses on empowering SMEs through the participation of local communities. Social enterprises and community-based organizations can leverage local social networks for a good cause or to fuel a local business or sometimes for supporting a specific community (like women entrepreneurs).
Microfinance entities are usually focused on supporting small businesses in their communities that don’t qualify for a bank loan. Some examples of nonprofit microfinance organizations are Accion, Bentley Microfinance Group, Grameen America, Justine Petersen, Opportunity Fund, etc.
Donation-based crowdfunding, which is also a fast growing subsegment, allows donors to support charitable or social causes or civic projects for no financial or material returns. Some examples are GiveForward, PifWorld, FundRazr, Rally, Indiegogo, etc.
Invoice trading is a relatively fresh area that has been enabling small businesses to sell their invoices or receivables to many individual or institutional investors at a discount for working capital. Supply chain financing platforms can also be included in the category. Though this subsegment is still in its early days, there are already a few companies operating with the model. Examples: Platform Black, MarketInvoice, InvoiceFair, etc.
This model enables long-term investments focused mostly on renewable energy firms (for example, to finance wind farms or solar panel installations). With growing concern over natural resources and increased interest towards renewable energy technologies, this category has a great potential to be among some of the hottest ones globally. Green tech companies are gaining attention and momentum and will require significant resource allocation to have an impact on countries across the globe in the near future. Some examples include Mosaic, Windcentrale, Abundance, RE-volv, CollectiveSun, SunFunder, etc.
The list of models and companies is certainly not exhaustive; imaginative innovators are always coming up with fresh ideas on the ways to finance businesses, communities or support individual aspirations. In the near future, we may see a rapid growth of other alternative lending models with very promising representatives as the lending business is constantly evolving and attracting significant attending and investments.