Alternative Lending is a very broad term used to describe the wider set of business loan options available to business owners.
Given the general under-penetration of banking services in India, it is no surprise that Alternative Lending channels are making inroads.
The Indian landscape is ripe for Alternative Lending to thrive in all its forms including online NBFCs, Loan Marketplaces, P2P platforms, and others. Consider the numbers: as per Rajya Sabha discussion records, “RBI had informed that gross outstanding credit for top ten corporate groups is Rs 5,73,682 crore as on March 2016”. Compare this with total credit to the MSME segment of Rs 11,10,000 crores spread across 2.06 crore loan accounts as on March 2016.
This is all that formal banking channels have on offer for 5.1 crore enterprises providing employment to 11.71 crore persons and contributing 37.5 per cent of India’s GDP! Moreover, the 4th All India survey of MSMEs states that close to 90% of MSMEs are dependent on informal sources.
So what is the benefit of approaching an Alternative Lending source?
The Loan Buffett vs. The Fixed Menu
Everyone is familiar with the plain vanilla loans available from banks — In addition to these, there is a plethora of alternative lending options available for small business owners. This includes E-commerce Merchant Cash Advances, Unsecured Business Loans, Seasonal Working Capital Financing, Various Forms of Short-Term Funding, Equipment Loans and Business Line of Credit. Loan Frame for example has more than 50 products in its marketplace suite. This choice goes well beyond being just an eye-pleasing variety. A small business can choose the specific loan based on the purpose, thus increasing chances of approval and lowering cost of borrowing.
Tailored Approach vs. Off-the-shelf Loans
Traditional banks follow strict and inflexible credit policies that are replicated across products and borrowers. More often than not, these are relevant for larger, more established borrowers and end up complicating the applications by smaller businesses. The SME owner is laden with redundant documentation requirements, unreal covenant expectations, and needless scrutiny that invariably leads to either rejection or a higher interest rate.
In Alternative Lending, the interests of the borrower are more front and centre. Documentation and compliance requirements are adjusted based on the type of loan product.
Beyond Just Lending
Borrowers are used to approaching banks and picking from the 2-3 off-the-shelf products that come closest to meeting their requirements. Many Alternative Lending channels such as Loan Frame provide value added advice to the borrower as to which loan product is more appropriate, leading to more efficient and effective borrowing. There is also significant assistance provided in drafting the loan application and ensuring completion of documentation.
Alternative Lending channels make it possible for a borrower with a variety of facilities across lenders to consolidate debt under one lender. This is facilitated by multiple factors such as a common platform, deep lender relationships, variety of loan products, and a better understanding of the borrower’s requirement.
Read here to know more about how debt consolidation can help improve credit standing and lower borrowing cost.
The Sheer Convenience of It All
Alternative Lending channels save you a lot of time and effort. You get to be evaluated against various options online and can spend your energy with the best one rather than waste energy in running from one bank branch to another waiting on bank officials. This helps you to focus on what you are good at and interested in – running the business – rather than on financing.
The traditional lending process involves loans of paperwork and physical visits, which combine to cause delays in the approval process. Alternative Lending companies on the other hand leverage technology to cut down on both time and effort. Firstly, eligibility checks are based on proprietary algorithms that take mere seconds even as they incorporate many aspects beyond just the credit score. These include financials, credit history, business profile, and other business-specific data. In short, you have a more detailed assessment done in a shorter time, leading to swift credit disbursal. It’s no wonder that the rise of the tech-based Alternative Lending channel has coincided with the widespread adoption of initiatives such as eKYC, Aadhar, and UPI.
In this way, Alternative Lending helps solve not just the funding availability problem but also addresses the vexing problem of unduly high interest rates for small businesses. As Narayana Murthy says,
If you cultivate inexpensive habits, you will not become a victim of money in later years. And, you will not fall into the trap of greed which leads you to do things that you will later regret.
This applies in equal measure to personal habits and business expenses, including what you pay on your borrowings.
Some of the NPA-laden and capital-starved banks are either unable or unwilling to step in and plug the big funding gap that exists for MSME borrowers. Alternative Lending is a viable alternative for such borrowers. Furthermore, loan marketplaces like Loan Frame have several banks on their platform, which serves as a bridge between the traditional and the alternative.