Alternative lending refers to the practice of providing loans or credit to individuals or businesses outside of traditional banking institutions. This type of lending has become increasingly popular in recent years due to the limitations of traditional lending institutions, such as long approval times, strict requirements for credit history, and limited access to funding for certain groups of borrowers.
Alternative lending platforms use a variety of sources to fund loans, including individual investors, private equity firms, and institutional investors. These platforms leverage technology and data to assess the creditworthiness of borrowers, often using non-traditional metrics such as social media activity, business revenue, and payment history on bills or rent to determine creditworthiness.
Types of alternative lending include peer-to-peer (P2P) lending, crowdfunding, invoice financing, merchant cash advances, and microlending. P2P lending involves individuals lending money to other individuals, typically through an online platform, while crowdfunding involves multiple investors contributing small amounts of money to fund a specific project or business venture. Invoice financing involves companies selling their unpaid invoices to a lender at a discount in exchange for immediate cash, while merchant cash advances involve a lender providing a lump sum payment to a business in exchange for a percentage of future sales. Microlending involves providing small loans to low-income borrowers, often in developing countries, to help them start or expand small businesses.
Alternative lending can be beneficial for borrowers who may not have access to traditional banking products, or who may need to access funding quickly. However, borrowers should be aware that alternative lending products can come with higher interest rates, fees, and stricter repayment terms compared to traditional lending products. As with any financial product, it's important to do your research and carefully consider the terms and conditions before taking out a loan.