Alternative lenders are here to stay. Fast forward to 2018 and the Alternative Lending industry has matured and undergoing some consolidation across borders. This is an update on the 2016 view of the AltFi industry as it emerged from the global financial crisis. Lending was among the earliest segments of finance to be disrupted by the technology revolution currently sweeping the industry.

Alternative lenders swooped in as big banks pulled back on making small business and personal loans in the wake of the financial crisis. As a result, the nine lenders on the Forbes Fintech 50 for 2018 are some of the largest and most established companies we feature on this, the third edition of our list. Two of the most prominent U.S. digital lenders—LendingClub and OnDeck—have already gone public (though the markets have not looked on them kindly). Meanwhile, behemoths ranging from retailer Amazon to investment bank Goldman Sachs have opened lending operations that emulate some of the best of what the startups have to offer.

Alternative lenders consist of a wide range of non-bank institutions with different lending criteria and business models offering private debt, mezzanine, opportunity and distressed debt. You have the larger institutional funds; however, most are new players from investment banks, offering unsecured business loans on online lending platforms. Typically offered to small business owners struggling to obtain working capital from traditional banking channels.

How to use Alternative Lenders

  1. Equity acquisitions – to reduce equity contributions or enable a more flexible structure
  2. Growth capital – enable growth opportunities and fund private company acquisition strategies
  3. Consolidate shareholder base – enable management buy-outs
  4. Consolidate bank lending – refinance existing debt with over leveraged structures
  5. Issuing unsecured Bonds – alternative capital raising structure to raise working capital

The key advantages of using Alternative Lenders

  • Useful for fast and short-term access to capital to accelerate the growth of the company and take advantage of opportunities
  • No equity raising is required as alternative lenders are flexible with debt structure on a deal by deal basis.
  • Varied lending criteria to suit most industries, with EBITDA’s from SME’s to large corporate PE models.

Alternative lenders has provided SME’s with more choice in

Online applications using real-time business data such as monthly turnover and profit margins are taken into account by an algorithm that helps to determine whether your business presents a high or low risk to repay the loan. Instant pre-approvals and your business can be funded within 3 to 10 days compared with traditional bank finance.
Your business has the option to raise funds through a peer-to-peer lending platform offered around the world matching you to individual investors without the need of a traditional financial intermediary. These platforms allow you to list your capital requirements online for investors to assess and determine the credit match, then fund your loan.  This is an excellent alternative for innovative or new businesses that do not fit traditional lending criteria.
Equity Crowdfunding
If you prefer a quick cash injection via equity, then raising capital through an equity crowdfunding platform is an option for start-ups who do not meet the requirements to run a costly capital raising program. The downside here is your business receives contributions from a large number of individual private investors who in return become a shareholder in your business. The upside is highly beneficial for new businesses to create brand awareness, accumulate loyal fans and build a customer base, and test market acceptance of your ideas before making costly mistakes.
Payment of credit and sales invoices has been around for a while now, and remains hugely popular as another way to receive funding and keep your cash flows stable. Quicker online processors have been developed to deliver debtor and creditor finance where an invoice can be paid within 24 hrs once your account is approved.
For retailers, a merchant cash advance is an excellent source of funding. This works by advancing a lump sum payment in exchange for a pre-determined fixed percentage of your daily credit and debit card sales until the full amount is repaid. Repayments are flexible as the business repays less in months were sales are slower and more in months when business turnover is higher. Typically a higher approval rate for companies with bad credit, are operating for less than 12 months and have no collateral to provide as security.

Alternative Lenders Backstory Post from 2016

What a difference a year makes. In 2015, Lending Club was a marketplace-lending leader with a $7 billion market cap, and the media was heralding the approaching tech-enabled lending revolution.

Now, with Lending Club and OnDeck Capital’s shares getting pummeled by public market investors, news outlets are asking if this is the end for fintech lenders. The same pundits who once lauded the potential of newcomers to “transform credit evaluation and loan origination” are now declaring that those alternative lenders “will not be significant players.”

As we at Bessemer Venture Partners have evaluated these businesses as potential venture investments over the past several years, we struggled across a few key fronts when trying to justify the lofty valuations of these tech-enabled, non-bank lenders. Now, with regulators worried that fintech lenders may destabilize the financial system and journalists racing to point out the cracks appearing among fintech lenders, we wonder if the pendulum has swung too far in the opposite direction. Ultimately, we feel that many of these businesses were simply evaluated under the wrong valuation lens.

For more than a decade, the shifting environment in what we like to refer to as the tech-enabled lending space has driven much of the industry’s excitement and our own investment thesis for the category. We remain enthusiastic about many of the businesses created in this space, beginning with companies like our own portfolio company Zopa, a pioneer in the category that launched in the U.K. in 2005, and Lending Club and Prosper shortly thereafter in the U.S.

Since then, we have seen an explosion of startup activity by many talented entrepreneurs attacking every element of the lending markets, from student debt, to small business loans, residential mortgages, commercial real-estate, payday lending and more.

These markets, historically built upon legacy systems and stale underwriting practices, continue to be ripe for disruption, and we still firmly believe that software-enabled, data-driven companies will lead the way. While the favorable fixed income market conditions and historically low interest rates over the past several years certainly can and will change, there are a number of other market developments that are here to stay.

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