Professional Documents
Culture Documents
awareness, and fintech. From innovative loan options and streamlined approvals driven
by data analytics, alternative lenders take advantage of technology to meet the
underserved needs of small businesses while changing the lending landscape. As
incumbent banks pull back from funding small businesses during the financial crisis in
2008, the opportunity to penetrate the lending market presented the rise of fintech
altering the lending industry that now is home to both traditional banks and alternative
lenders.
While banks have traditional finance models and the power and money to make interest
with fewer large corporate multimillion-dollar loans, alternative lenders have the
technology bandwidth to process more loans making profitable interest on higher
quantities of smaller loans. In today’s lending world it is banks vs. alternative lenders;
competitors, yet different by nature creating an environment that has made room for both
over the last 10 years.
Alternative lenders have higher approval ratings than traditional banks due to their
ability to assess more factors than the traditional credit score of historic data on previous
loan repayments. High approval ratings are possible thanks to the detailed data
alternative lenders can collect and analyze using a combination of algorithms, artificial
intelligence (AI), and machine learning to better determine an applicants’
creditworthiness and risk. Fintech lenders use alternative credit scoring to assess
applicants’ digital footprint to determine creditworthiness such as rent, utility, and
telecom payments, in-depth bank account details and behavior, and social media
engagement to gather an accurate picture of integrity and intentions. With the ability to
evaluate thousands of data points, alternative lenders are able to capture more segments
of smaller businesses that would have otherwise reported a poor traditional credit score.
Focusing on current financial discipline, habits, and other interactions provide better
accuracy of applicants’ ability, stability, and intent of paying back borrowed funds
compared to traditional scoring methods.
Not only do alternative lenders offer loans to small and medium-sized businesses (SMB)
who might not otherwise qualify for a commercial bank loan, they offer more financial
solutions and a better customer experience. Over 40% of 5,200 retail
consumers surveyed from Oracle perceive nonbanks to offer better investment services
than a traditional bank. A borrower can quickly upload the relevant documents,
statements, pay stubs, and other pertinent documentation to receive pre-approval letters
almost instantly in some cases. Fintech’s accelerated lending decisions and fast loan
approvals can offer small businesses with funds in a matter of a few weeks or even days.
Traditional banks have not turned a blind eye to the power of streamlined IT processes;
to combat competition some have bought non-traditional lending companies, and others
have made partnerships with alternative lenders. Most banks have adopted tech
capabilities with electronic payment and online services, but innovation is much easier to
develop in an IT environment packing in as many possible applications onto one
platform. For a large bank, implementing a new core-banking system costs an average of
$1 billion. At the end of the day, banks live within different finance and business models
than alternative lenders and are chartered by government regulations. Compared to
private lenders’ AI data collection, traditional banks cannot become as flexible nor offer
a variety of loans to less desired clients while leaving SMB without the financing they
need.
The main differences between alternative lenders and institutional lenders
With over 50 financing options in the market today, small businesses should weigh their
options, examine terms and rates, and consider their specific finance requirements to
determine their best-suited lender and loan type. Alternative lenders are generally more
transparent and offer more flexible solutions, but are less regulated, so SMB’s must be
analytical when shopping for financing.
Alternative lenders have altered the lending industry and have matched incumbents with
small business loans in the marketplace. LQD Business Finance has engineered an in-
house proprietary lending structure that utilizes fintech data-driven insights and
streamlined underwriting processes to offer transparent, flexible, and customizable
financing solutions to underserved businesses today. Apply for a business loan to launch
your growth and continue to watch the rise of alternative financing in the continually
shifting lending industry.