The massive IPOs of alternative lending stars Lending Club and OnDeck appeared to have opened the eyes of venture capitalists to the world of alternative financing. With the first two months of 2015 already showing significant investment in the market, reports say that alternative lending could explode into a trillion-dollar industry.
Lending Club opened the door with its $9 billion IPO and OnDeck with a $1.3 billion IPO, both in December. The massive debuts have paved the way for alternative financers to make their own splash when going public, and reports say 2015 is already proving a reflection of December’s two alternative lending pioneers.
According to reports, January and February saw $340 million worth of investments in the alternative lending space from venture capitalists. CrunchBase data reported that the figure is more than twice what has been seen in any quarter before – already, 17 deals this year on average raising $23 million in funds each, compared with the average of $7 million in capital raised for lending startups in 2014.
Experts note that it’s not just alternative small business financing that is booming – auto and student alternative lenders are also making waves. But the emergence of these new services is a byproduct of the platform first laid out by alternative lenders looking to capture small businesses in need of capital and finding high interest rates or application denials at the big banks.
Alternative financers like Lending Club and OnDeck, experts say, have proven this business plan to work. “The reason these alternative lending platforms are coming up is that platform lending is simply more efficient for both the borrower and the lender,” managing partner at New York venture capital firm RRE Stuart Ellman told TechCrunch. “The borrower is able to find loans that they otherwise weren’t able to get – either from the banking crisis or from the banks tightening up their lending process – and lenders have the ability to do their diligence, see the risk and the interest rates, and make the loans they want to on an a la carte basis.”
Industry experts also note that since the financial crisis, lenders are depending more on data to reduce risk of their financing ventures. Alternative finance platforms, reports say, and the innovative technology they use often make it easier for both lenders and borrowers to gain insight into the exchange of money than it would be through traditional lending methods.
Plus, alternative lenders agree: the industry, thanks to its ease-of-use and tech-savvy platforms, will only expand from here.