Data and research

Alternative Lending – An overview

Author : Angela

In 2015, the alternative lending sector received an all-time high, $5billion equity funding, but 2016 seems to be another record setting year. With only one month down the line, the sector has already received $3billion in funding. SoFi’s $1billion milestone funding round in 2015 was surpassed by China-based online lender, Lufax, with $1.2billion funding in January 2016. The sector has already seen the rise of about 10 Unicorns, few of which have gone public i.e. Lending Club, OnDeck and Yirendai. Here is a graph showing total equity funding of Unicorns in lending sector.

chart Alternative Lending

Alternative Lending has been one of the most disruptive innovations in the financial industry, changing forever the way people borrow and lend money.  It covers all the loan options available to individuals and businesses apart from the traditional bank loans. One of the main reasons behind increasing popularity and acceptance of online lending platforms is their ability to give loans to people with low or no credit scores at all, using their proprietary alternative credit scoring algorithms. Their automated loan processing offers convenience to the borrowers who were fed up with the lengthy procedures followed by the banks. Also P2P lending has given people a new and a better investment avenue as compared to the traditional treasury bills.

The sector consists of direct lenders, peer to peer (P2P) lending platforms and lending marketplaces. Direct lenders are the platforms that have a lending license and lend through their own books. P2P lending covers platforms which connect individual borrowers and lenders. Whereas the capital lent on lending marketplaces comes from accredited investors as well as financial institutions. Recent times have seen the line between P2P lending and lending marketplaces disappear, as now a major percentage of the money being lent on the P2P lending platforms comes from institutional investors.  The US’s biggest P2P lending platforms, Lending Club and Prosper are now flooded with institutional money. Recently, J.P. Morgan acquired nearly $1 billion worth of Lending Club loans.

Consumer Lending

The initial alternative lending platforms were focused on consumer credit especially personal loans. The pioneer in this space is Prosper which launched its platform in 2005, followed by Lending Club in 2007. While Prosper has disbursed $5 billion loans till date, Lending club has surpassed every other lending platform with $13 billion in loans disbursed. While these both are US based platforms, the early entrant in Europe was Zopa which was founded in 2005 and is headquartered in London. Another Unicorn company in this space is Avant which was founded in 2012 and has disbursed $2billion in personal loans. Though Lending Club and Prosper are going horizontal by offering business loans also, there are no signs of consolidation in the industry as we have seen a number of successful startups in different verticals like student loans (SoFi, Earnest), auto loans (DriverUp, AutoFi), wedding loans (Promise Financial), medical loans (PrimaHealth Credit).

SoFi which offers student loan refinancing was launched in 2011. It is $1.4billion funded and has disbursed loans worth $6 billion so far. It has also entered mortgage and personal lending space.  While Earnest and CommonBond are two other established players offering loans to college graduates, the sector has seen new players like Skills Fund which offers loans to students attending coding bootcamps.

The sector has also seen innovative purchase financing models like Klarna and Affirm, which might threaten the credit card industry in future through their easy online purchase checkout point financing.

Another category of consumer loans is payday loans. These are the loans which are taken for  a tenure of about a month to cater to urgent financial needs until the next month’s salary arrives, and carry interest rates which can go as high as 300% pa. One of the big firms in this space is Wonga which was launched in 2006 and is now present in UK, Canada, Spain, Poland and South Africa. Another big player in this segment is LendUp which received $150 million in debt and equity funding in January this year.

A new vertical which has gained traction is ‘employer loans’ where two startups, SalaryFinance and Neyber, were funded recently. These are the loans which are offered through the employer and repayments are automatically deducted from the payroll each month.

Lending platforms like Kiva are defining an altogether different segment in the lending space. These platforms facilitate P2P micro loans for local entrepreneurs and help communities worldwide to rise out of poverty.

Business Lending

Once alternative lending saw success in consumer loans space, into entered commercial loans too. One of the big players in this sector is OnDeck, a US-based direct lender offering term loans and lines of credit to businesses. It was founded in 2007, went public in December 2014 and has disbursed more than $2 billion loans till date. The biggest P2P lending platform for business loans is London-based Unicorn, Funding Circle, which was founded in 2010 and is $273 million funded. Another Unicorn company in this space is working capital lender, Kabbage, which was launched in US in 2009 and has now expanded to UK. It has also entered consumer loans space by launching Karrot in 2014.

Real Estate Lending

The alternative lending has also entered the mortgage space with LendingHome being one of the top funded companies in this space. It was founded in 2013 and is $100 million+ funded. It offers bridge loans, rental loans and consumer mortgage loans. It is a marketplace which allows accredited retail investors and institutional investors to invest in real estate through its platform. Realty Mogul is another big player in real estate financing segment. It offers both debt and equity crowdfunding for commercial and residential properties. It was founded in 2013 and so far $150 million funds have been invested through its platform. Other major lending platforms in this space are Patch of Land, LendInvest, AssetAvenue, RealtyShares, LoanDepot and Ground Floor.

The list of companies in this space is becoming endless as alternative lending is expanding to different countries. The aim of this article was to give its reader an overview of the ‘Alternative Lending’, stay tuned for deeper insights n the sector.

Disclaimer: All the figures in the article are taken from either company’s website or trusted publically available sources.

Key industry numbers

  • A total of over 800 companies have been founded in this field since 2005
  • Personal Loans – 170 companies
  • Student Loans – 35 companies
  • Car Loans – Number TBD
  • Real Estate Loans  – Number TBD
  • Business Loans – 270 companies
  • Other loans  – Number TBD

Lending Times Indexes

  • Average seed round working capital investment amount $1.99 mil
  • Average round A working capital investment amount $14.57 mil
  • Average round B working capital investment amount $18.96 mil
  • Average round C working capital investment amount $33.74 mil
  • Average investor yield across all platforms surveyed 8.82%

Most active funds in this space :

  • QED Investors (Klarna, Avant, Prosper)
  • Victory Park Capital ( Avant ,Borro, LendUp)
  • First Round Capital (LendingHome, OnDeck, Ernest)
  • Blue Elephant Capital Management ( Prosper, Boat Loans, Harmoney …)

Notable investments :

More information coming soon !


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