Alternative Finance vs Banking: Industries Non-Traditional Lenders Turn Mainstream In
Alternative lending is a rapidly growing industry that outperforms traditional banks thanks to a data technology-driven approach and fintechs. As some banks are pulling back from funding SME businesses, digital lenders powered with cash advance software are stepping up to place in various domains, including real estate and shipping.
In this article, we’re going to discuss mainstream lending or how alternative lenders outperform banks and figure out the top industries for digital financial organizations.
How Alternative Lenders Outperform Banks
While banks follow traditional finance models and are powerful enough to make interest with fewer large corporate loans, alternative lenders take the advantage of technology to process more loans with profitable interest rates for both lenders and SME borrowers.
Based on the survey by Oracle, over 40% of retail consumers (5,200 respondents) choose non traditional lenders for investment services rather than traditional banks. There’s a reasonable explanation: alternative lenders can quickly process documents, offer accelerated mainstream lending decisions, and approve loans faster. Alternative financing is an opportunity to get funding in a matter of a few days or even hours.
Fintechs such as HES design systems that are able to process big data technology and hard information as well as better analyze risks. They have higher approval ratings than banks thanks to the ability to assess more factors and parameters to build alternative scoring models and calculate credit scores. Lenders use a combination of algorithms, AI and machine learning to better predict an applicants’ creditworthiness and the outcome of any lending decision. The power of alternative credit scoring is in gaining assess to applicants’ digital footprint, such as telecom payments, rent, social media behavior, in-depth bank account details, and more. With the ability to evaluate thousands of data points, an alternative lending platform can capture more segments and score thin-file borrowers thus outperforming traditional credit companies.
Traditional banks in order to combat competition make partnerships with fintech and expand their technological advancements. Most banks have already adopted e-wallets and payments as well as online services automation, however, innovation of banking is tough. Unlike alternative lenders, banks are not limited in lending operations only. They live within different finance and business models and are charged with government regulations. So they’ll never be as flexible as alternative lenders and will lack a variety of loan products, that’s why SMEs are less desired customers for them.
Industries Alternative Lenders Become Mainstream In
Non-bank financing has gained recognition in the last five years and currently, it already accounts for around 51% of the total European market and above 55% of the US one. However, it’s believed that regulations will continue reducing banks’ appetite to account for the greatest part of the market, while alternative lenders will keep filling the gap, following the goal to account for 90% of the total market. According to Trepp, alternative lenders are no longer the lenders that are in demand when all other borrowing avenues have been exhausted. Moreover, in several business domains, they’re the number one service for financing.
Construction loans in the multifamily space
As more vaccines are administered, the real estate sector expects that multifamilies will become the main recipients of commercial real estate lenders. Construction loans attracted the attention of the multifamily community during the pandemic, while multifamily property has been one of the top-performing property types for lending and rent collection.
According to Brian Stoffers of CBRE, multifamily investment volume will reach about $ 148 billion by the end of 2021 (a 33% increase over 2020). It’s predicted that non traditional lenders will be the main investment power in multifamily mainstream lending during 2022. Since this real estate is highly demanded among millennials, immigrants, and other thin-file borrowers ignored by traditional lenders, alternative lending will be able to cover their needs for higher-end properties.
To give an example, Madison Realty Capital, the New York City-based private equity firm, launched a $ 1 billion investment fund to grant construction loans of up to 75% cost. While banks have capped around 50% of cost during the pandemic. As stated by Multi-housing News, Madison has already closed a $ 165 million construction loan for a Boston apartment building and a $ 173 million loan for an apartment building in Chelsea.
Stoffers claims that among multifamily housing, alternative real estate lenders need to focus on industrial buildings, long-term leased offices, low-leverage leased retails, and conservative hotels.
Ship transportation financing
During the pandemic, the shipping industry has undergone considerable change by moving mostly towards alternative financing. According to Conyers, this trend has increased over the past years since certain banks, most notably European ones, started exiting the sector and selling their shipping portfolios or not taking on new business while existing loans are paid off.
So, whereas many non-bank lenders are initially focused on real estate financing, ship financing is also becoming an increasingly mainstream category for alternative investors. It is expected to attract up to 7% of the highest level of investment from non-traditional lenders within the upcoming years after the infrastructure, real estate, and healthcare sectors.
Many ship owners, especially SME ones, can’t finance or refinance their ships because loans under $ 20 million are often not available in traditional banks. Banks also refuse to refinance an application if a vessel is older than a bank expects. In this regard, alternative lending might be the only viable solution. It’s noted that non-traditional lenders are becoming mainstream providers of capital for the shipping domain.
Direct Ship Finance, for instance, is a company that works with shipping loans and offers fast decision-making with flexible crediting terms. It’s possible since the agency’s lending mandate is based on the characteristics of the shipping industry, not by the banking regulations designed for a wide range of lending products.
Mainstream lenders do not only pose serious competition to traditional lenders but also occupy niches where they can’t provide profitable services to potential clients. This happens due to several reasons:
- Non-banking lenders offer better terms than traditional ones.
- Alternative lenders face fewer regulatory restrictions.
- Mainstream financing institutions go above 60% of usual loan-to-value ratios, they might go up to 80%.
All these made it possible for alternative lenders to reach international markets and become mainstream in real estate, shipping, healthcare, and other lending spheres.
To start your mainstream lending business, get in touch with HES and book a free demo tour.