How challenger banks are transforming the lending market

Businesses looking to take out a loan today have many more providers to choose from than 10 or 20 years ago. Previously, traditional big-brand banks dominated the lending market, but now start-ups and SMEs seem to be moving increasingly towards alternative forms of funding like ‘challenger banks’ and peer to peer lending.

Part of the reason this trend has especially grown over the last decade or so is because mainstream banks are seemingly more reluctant to offer loans to start-ups and small businesses as they can be considered a risky investment. Their stricter eligibility criteria can deter SMEs from applying for a loan, or force them to find alternative means of funding from new style lenders.

Some measures, such as the government’s alternative remedies package and the Open Banking system, have even been introduced to help a greater number of lenders offer competitive loans and services, as well as encouraging SMEs to try these alternative providers.

Recent research by Know Your Money also indicates a rising popularity of alternative lenders, as it shows a growing search interest in new style lending options that coincides with a rising search interest in business loans. Meanwhile, the interest in traditional banks appears to be remaining stable. This indicates that it is these new and emerging alternative lenders that are benefiting from this increase, with businesses turning to them for a number of reasons.

Who are these alternative lenders?

Challenger banks and fintech lenders are some of the platforms that small businesses are turning to for funding. These smaller providers tend to work predominantly online, offering a digital user experience that can help businesses get a loan in an easier and quicker way than before.

Peer-to-peer is another of the online lending platforms that small businesses can use for funding. With this form of lending, private investors can deposit funds into the online platform, which then loans the money out to businesses.

A faster lending process

One of the big draws of these alternative lenders is their speed in processing and approving applications from businesses. In the past, business owners would need to fill out lengthy application forms for each individual bank, and find all the relevant documents showing the financial history of their company. Bringing together this information would take a considerable amount of time for business owners, and they would then have a long wait to find out if they are eligible for the loan as the bank processes all the data.

However, thanks to fintech lenders, the process of getting a loan can now take a matter of minutes. The digital nature of these alternative lenders, and the introduction of the Open Banking system, means that businesses can easily share their financial history and business performance with prospective lenders. The lender can then analyse this information much faster than traditional banks, coming to a decision within a matter of minutes in some cases. This is clearly a main reason why alternative lenders are so appealing to businesses wanting to access cash fairly quickly, without needing to go through a long and drawn-out process.

Better chance of approval?

With the greater variety of lending options on offer, businesses may stand a greater chance of having their loan approved. Businesses are more likely to find a lender that suits their specific requirements, helped by the advanced digital methods and software programmes used by fintech platforms that can analyse their application. Additionally, these digital alternative lenders may be able to offer more competitive loans and potentially offer loans to small businesses that were rejected by traditional banking lenders.

What all this shows is that the lending market has transformed, and is continuing to transform. Rather than high-street banks being the only real option for a small business looking for a loan, nowadays there is a much broader choice, especially for those who may present a slightly higher risk. With faster application and approval processes, it is no surprise that challenger banks and alternative fintech lenders are rising in popularity in comparison to the traditional banks.

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