A bumpy road for alternative lenders
It’s not been an easy road for alternative lenders during the coronavirus pandemic. Despite the crisis driving demand for these lenders like they’ve never seen before, satiating this demand is coming at a big price. Namely in the form of risk, as they take on small businesses – rejected by big banks for that reason – and try to predict whether they will default on the loans post-crisis.
As managing director of alternative lender, ThinCats, Ravi Anand told the Financial Times: “No doubt there’s going to be some casualties where credit [decisioning] wasn’t robust enough or funding sources weren’t stable enough […] But the ones who come out will be stronger and will get a bigger market share”.
Many Gen Z entrepreneur hopefuls with “credit thin” files will need alternative lenders post-coronavirus
But as alternative lenders take on the potential risk of high default rates, some feel as if doing so means they’re finally being heard by bigger businesses which might never have gone online for financing pre-coronavirus.
“Lots of larger businesses didn’t previously go online for funding, so it [coronavirus] has opened the eyes of these clients to the alternative lending market,” Think Business Loans’ CEO Jamie Stewart tells FinTech Futures. “It’s given us an opportunity to stand toe to toe with the banks and be measured.”
The question is, will those alternative lenders that survive the crisis go on to breed real competition for major lenders, or will they get bought off one by one by their legacy competitors?
How banks and alternative lenders work through this current situation will determine the course of those budding middle and high school entrepreneurs – 41% of which plan to start their own business one day, according to the Small Business Forum.
With many Gen Zs already faced with the challenge of “credit thin” files which fence them out of traditional loan offerings, the existence of alternative financing solutions post-crisis, which offer more inclusive credit scoring systems, will be a big component of future entrepreneurial success.
Before coronavirus, Funding Circle was one of the only big names associated with alternative lending in the UK
Currently alternative lenders’ abilities to pick up the opportunities left behind by major lenders have been significantly hampered by a lack of accreditation. In April, only two alternative lenders got accredited by the British Business Bank for the Coronavirus Business Interruption Loan Scheme (CBILS), which were Funding Circle – whose shares have more than doubled – and ThinCats.
In the US, some fintech lenders such as Kabbage have been able to partner with SBA-approved banks to issue Paycheck Protection Program (PPP) loans to their customers.
But those lenders which are neither government accredited nor backed by a major bank can only lend so much to small businesses before their funds run out. Marketplace lenders sell most of their loans to third-party investors, but these have dried up or practically closed. Access to government-backed loan schemes will help act as a subsidy for their funds in the interim.
We saw this when 166 lenders – many of them alternative financers – led by WorldPay’s founder Nick Ogden, demanded the UK government hand them £5 billion so they could continue funding the volume of small businesses in need.
And when the UK’s Financial Conduct Authority (FCA) required all British lenders to give businesses repayment holidays during the coronavirus, a further blow rained down on those lenders already struggling to fund their financing.
“How are we supposed to show leniency when no one is giving us liquidity to operate and get through the storm ourselves?” David Goldin, chief executive of online business lender Capify told Yahoo Finance, pointing out that alternative lenders are struggling businesses too.
Before coronavirus, names like Funding Circle were some of the only big names associated with alternative lending in the wider UK lending industry. But despite the crisis offering up a chance to get noticed, it has also pushed a lot of risk onto smaller lenders which inevitably won’t get bailed out by the government, unlike the major high street banks which will once all of this is over.
