What is the Scope of Alternative Lending Startups in India

Tanya Verma

05 Sep, 2019

Alternative Lending is a term used to describe the vast range of loan options available to consumers and businesses excluding the traditional bank loan. It is available to individuals and business owners who are not able to take a loan from banks because of their ineligible credit score or due to any other potential reason. Such people can easily take credit from Alternative Lending platforms.

What is Alternative Lending?

Alternative Lending is a lending option for individuals and businesses, like any other lending platforms such as P2P Lending, FinTech, etc. mostly preferred by small businesses and startups. It provides small businesses and startups with credits in an easier way than other traditional banking platforms.

Often Small businesses and startups are not able to qualify for funding from traditional banks because of strict eligibility norms.  On the other hand, businesses are more likely to qualify for funding if they choose Alternative Lending option.

Alternative Lending is comparatively flexible with its terms of lending and has less strict rules than traditional banks. Therefore, they easily provide loans to people and business owners even when they don’t have much experience, or have a bad credit score, etc.  

Is Alternative Lending an Expensive Option?

Sometimes alternative loans can have higher interest rates than traditional banks, but it covers up this drawback as it is available to people who cannot rely on banks for getting fundings.  They can build opportunities for new businesses that otherwise wouldn’t have been able to get credit from traditional financial institutions. They can get easy loans in this way and can invest back into the business, manage cash flow and continue to operate for years in the coming future. 

Types of Alternative Loans

Although there are numerous forms of Alternative Lending, here I am detailing some of the most common ones used by business owners on a regular basis:

• Merchant Cash Advance: Merchant Cash Advance or MCA is a suitable form of Alternative Lending for businesses that accepts credit card payments.  It is not a type of loan; it is cash advances given against some profit percentage of sales of credit/debit cards by the business. On other words, we can say that the MCA^[1] provider charges or takes the percentage of the credit or debit card sales {as decided by both the parties} done by the company until the repayment of the loan amount.
• Line of Credit: Line of Credit is a type of loan that can be used as a credit card. The business owner who gets this loan can use it to pay daily or monthly working capital requirements and make repayment of the same.
• Intermediate-term loan: Intermediate-term loan is a type of loan for experienced and established entities. A company that is at least functional from the past two years and have positive cash flow can get this loan. The period of this loan can vary from medium to long-term which can be from six months to five years. Provided the borrower has to pay twice a month with interests ranging from eight to twenty-five percent.
• Short Term Loan: Small businesses usually opt for Short term loans that have an immediate demand for cash and turnaround in funding. The short term lenders are very flexible in providing borrowers with suboptimal credits. The range of the term of these loans can range from three to eight months with interest rates as low as eighteen percent and as high as fifty percent or more.

Also, Read: P2P Lending Structure in India

Benefits of Alternative Lending

There are several benefits of taking loans from alternate lending platforms. Let’s see what those are:

• There are fewer requirements as compared to traditions banks to qualify for getting loans
• You have plenty of choices and you can get a loan for the amount as low as you want
• Flexible interest rates. The alternative lending industry has is highly competitive so as a result, these firms sometimes lowers the interest rate on the loan they give
• The loan processing period is shorter compared to the traditional banks
• There is the flexibility of the terms of repayment of the borrowed loan
• Some alternate lending industry even helps you hire legitimate employees by providing adequate credits
• The loan application process is faster and easier
• You can get loans in a very less amount of time which as to be as less as one day and that too directly in your bank account
• You don’t need to tell the lender where you are going to use that loan money

Disadvantages of Alternative Lending

The major concerns while opting for alternate lending are as follows;

• Higher interest rates than banks
• The lender may go out of business one day
• Some lenders only provide large loan amounts
• You might not get any discount if you do not pay the previous loan on time
• Some lenders may charge extra, in the form of  hidden fees    

Top 10 Alternative Lending Startups in India

Given under is a list of top 10 Alternative Lending Startups in India:

Scope of Alternative Lending Startups in India

The last five to ten years have been a very beneficial period for the Alternative lending industry in India. Moreover, the evolution of this sector has become a subject of intense discussion amidst technology and financial sector. It is a type of industry which provides easy and affordable loans to small businesses, startups, SMBs, higher education students, mortgages such as housing loans, car loans, etc., small ticket borrowers, new to bank people and under-banked customers, etc.

In the year 2016-17, internet penetration increased from 20% to 30%. Also, the use of digital transitions has increased by 55%.  The increased use of digital lending has benefitted both lenders and customers. The lenders can check more information of the potential customer and the customers can surf online and gather more information of the lender’s reputation in the market, what are the types of limits for the loan they provide, etc. also borrowers can choose from a vast range of alternative lenders available online.

The alternative lending platforms computes the credit score of the borrower on the following basis;

• Geographical attributes
• Utility payment trends
• Asset ownership
• Verification of borrower’s Social media information
• Conventional sources like bureau reports

Moreover, alternative lending is becoming a preferred source of funding for SBO^[2] because of the advantages and benefits it carries. Also, the industry experienced a major boom in the year 2017 due to demonetization drive that took place in the last quarter of 2016.

Furthermore, in the same year, approximately 225 alternative lending companies was founded in India.  It is the second most funded industry. Also, it is one of the fastest-growing industries in India currently. The considerable reason for why it opts and majorly preferred by small businesses is because it involves less risk than banks and NBFCs and also offers customized/personalized services according to the customer’s needs.

Conclusion

The alternative lending industry has achieved numerous milestones in recent years. Additionally, it also became one of the preferred money lending options for small and medium business owners, startups, etc. Also, these platforms give loans to higher education students and they also provide car and house loans against mortgages. The major benefit of this industry is that they give loan to people or businesses that due to certain reasons are not able to get loans from traditional sources.

See our Recommendation: Peer to Peer (P2P) Lending in India