Is Alternative Lending a Viable Investment?

Get approved for a loan in minutes! Have access to money in just a couple of days! These are claims commercials, both on-air and online, make these days. You might think the fine print stipulates borrowing rates are 20 percent and that your first-born must be submitted as collateral.  

But these aren’t payday loans or high-interest, rent-to-own loans for individuals with poor credit.  This is a new type of lending called “alternative lending,” and many financial companies have entered this new territory.  

Technology gives them access to “big data,” a catchphrase that, in this case, describes massive amounts of data that contain a vast collection of credit histories and personal information. Their technological abilities allow them to quickly crunch numbers to determine the creditworthiness of a borrower and make a decision. Since the process takes place entirely online, finance companies’ overhead costs are much lower than those of traditional banks. That’s good news for borrowers!

But How About Lenders?

Successful lenders loan to the right people at the highest cost the market allows. Alternative lenders will likely have an advantage over traditional banking methods as more and more people opt for a quick, paper-free loan. We believe borrowers won’t miss the multiple trips to meet with a loan officer or to provide another year’s worth of financial statements!

For alternative lending companies, success will boil down to access to capital and the cost of that capital. They’ll need additional capital to grow their loan portfolios, which opens the door to outside investments. Presently, there are two main avenues for investing in alternative lending: Investors can loan money directly to lending companies or invest in a fund that makes loans to alternative lending companies.

When loaning money directly, investors are responsible for performing due diligence to ensure the investment is appropriate. When going through a fund, investors need to do their due diligence to make sure the fund is well-managed. However, it’s also the fund’s responsibility to perform due diligence on the lending companies and decide where to invest.

BFC’s Approach

We’ve been conducting due diligence on alternative lending funds that invest capital with multiple lending companies. We’re proceeding very cautiously with our research for two reasons. First, the industry is young and relatively new. There are no long-term track records to rely upon. Second, these investments are not liquid. You cannot invest with an alternative lending company today and decide tomorrow that you want your money back. If we determine these companies are an appropriate investment, we’ll let you know soon.