Alternative Finance Solutions Emerge But Security Key To Unlock Funding

Obtaining funding has been one of the greatest challenges for financial consumers in recent years as banks have sought to bring sustainability to their lending processes. The net result of more stringent checks has been a decline in traditional lending, but following this trend many alternative finance markets have emerged to the benefit of both individuals and businesses.

The new financial products that are increasingly available are not based on new ideas but on the simple notion that those with assets can put them to greater use by lending them to those who require borrowings to further their own interests. Traditional banks work on this principle and facilitate the process but increasing regulation coupled with identification of poor historic practice in making lending decisions, has caused the banks to hold back on what was a relentless programme of growth which proved unsustainable.

Historic growth in lending prior to 2008 was largely driven by unsecured loans. Due to their very nature these are the debts that are most at risk when customers are unable to meet their commitments. With no security to back the debt there are no assets in place to cover any defaults and recovery rates can be very low.

There are three main areas of alternative finance that have risen in popularity as the banks have tightened their lending criteria.

Peer to peer lending

The growth in this area is largely down to the ability of individuals or groups being able to do business without the restriction of a large corporate bank that has made mistakes in the past. Market rates are often very competitive and lenders often have a greater stake in the business to which they are lending and this can lead to an incentivised borrower making sure the repayments are met.

Crowd funding

This area of finance has a similarity to peer to peer lending but the relationship between lender and borrower may be more detached as lenders may spread their risk by collectively lending money in certain markets.

Microfinance

This form of finance is often associated with projects in the thirld world that are developed so that life can be improved for the millions of people affected by issues such as disease, war and starvation. The concept is similar to crowd funding in that businesses or individuals are able to borrow money that is provided by a collective group. This money is often used in relatively small amounts in order to develop micro businesses in the Third World.

How it works

Borrowers can be graded according to risk and lending decisions are made within strictly governed criteria. The guiding principle for lenders can be summed up by the founder of Funding Circle Dr John Henry Looney who says “Banks were happy to lend me the money but at much higher rates of interest – and they wanted more guarantees.” Contracts agreed with borrowers are legally binding and issues such as bad debt are not a major factor for lenders who use debt collection agencies to mitigate this risk.

Rates for lenders are higher than if they invest in traditional savings accounts but the spread of customers contributes to a reduced default rate. There are companies that lend primarily to individuals and other groups such Funding Circle that are set up to lend to small businesses. Both work on the principle of maximising income for lenders but at the same time increasing the ability of borrowers to access the funding they need at a competitive rate.

All these types of funding provide support to people who need it the most beause of their inability to obtain credit through traditional routes. As with traditional lending all forms of finance are strengthened if an agreement can be made over security.

Secured Funding

Secured loans represent an excellent source of finance and they are even more prevalent in the market due to the variety of products on offer. No longer are loans restricted to homeowners in stable employment.  Lenders offer a range of products for the self employed and price them according to risk. Recent developments in the financial markets mean that more people than ever have access to affordable credit but the sources of that credit are ever more diverse. Competition is healthy and this keeps the cost of borrowing low and also spreads the risk of default amongst lenders. There has never been a better time for consumers to borrow money because all lenders are heavily regulated irrespective of their core market and this provides confidence for consumers that whatever form of lending they choose, it is safe, secure and sustainable. The internet has facilitated the growth of alternative lending and the existence of comparison sites and expert opinion online has enabled consumers to make informed decisions about the type of credit they can obtain. This can only lead to a stronger economy with consumers and small businesses at the heart of a credit revolution that is underpinning future growth.

Secured Lending -represent an excellent source of finance and they are even more prevalent in the market due to the variety of products on offer. No longer are loans restricted to homeowners in stable employment. Lenders offer a range of products for the self employed and price them according to risk.