Nonbank lenders offer funding to small businesses with less-than-stellar credit. They are a growing source of financing and provide several benefits over banks.
Over the 1990s, new syndicated lending by nonbank arrangers grew twentyfold and now accounts for a substantial share of total syndicated lending in most countries and sectors (Graph 1, left-hand panel). Their international reach is also more extensive than that of banks. For more information about the Harper-Digital non bank lenders, click here.
Quick Access to Funds
Quick access to funds is essential whether you’re looking to pay for unexpected expenses or expand your business. These nonbank lenders offer fast and convenient ways to borrow money without the hassle of lengthy applications or high-interest rates.
Digital lending platforms like Reali and Kabbage appeal to tech-savvy consumers by allowing them to complete loan applications online, upload documents and track progress through their user dashboards. This convenience has also drawn many traditional financial institutions to partner with alternative lenders and nonbank finance companies to provide innovative solutions for their customers.
However, the procyclical nature of nonbank lending and its tendency to transmit shocks across borders warrants continued analysis. In addition, despite their rapid access to capital, these lenders do not enjoy public backstops, making them vulnerable to economic downturns.
No Spending Stipulations
Nonbank lenders do not have to comply with the same regulations and guidelines as banks, offering borrowers more flexibility in spending their loans. It allows borrowers to invest in their businesses in ways that may help them grow and thrive. For more information about the Harper-Digital non bank lenders, click here.
Moreover, investment scarcity has increased this year, making it harder for nonbank lenders to secure funding. As a result, 22% of these lenders report reduced demand. It is forcing them to reassess their product offerings and prioritise profitability. In particular, they are focusing on underwriting more established businesses and using data to reduce the probability of default.
Build a Banking Relationship
While the internet has brought us many conveniences, consumers still crave speaking directly with a human regarding their financials. While some digital lending vendors are trying to replace the one-on-one connections of relationship banking, this is not what customers want.
In addition, nonbank lenders can offer a more flexible approach to lending due to their smaller size. Some people think that this would make them more vulnerable in unstable economic conditions or that they might pass on interest rate rises more than banks do, but neither of these is necessarily true.
Nonbanks source their wholesale funds from different sources, including the securitisation markets and finance companies. This flexibility allows them to serve a broad range of industries. Their global presence is also more significant, and they tend to exhibit the “flight home” effect, in which they reduce their foreign credit exposure by more than domestic credit during financial crises (Graph A, left-hand panel).
Competitive Interest Rates
Nonbank lenders have become an essential source of global syndicated credit to non-financial corporations. Their yearly origination of such credits has grown twentyfold in the past three decades, and they now account for a sizeable share of this credit in most regions and industries. However, their expanding role has raised concerns that they may be a source of financial stability risks (Aramonte and Avalos (2021)).
Spreads between bank and nonbank arrangers vary considerably, with differences likely rooted in lender characteristics such as riskier borrowers, higher reliance on wholesale funding or more extensive market shares in specific sectors. Indeed, our evidence confirms that nonbanks display a flight home effect relative to banks when facing adverse shocks, cutting lending abroad more than at home (Chernenko et al. (2021)).
As more consumers turn to alternative financial institutions for their lending needs, the banking industry faces a significant challenge from digitally advanced nonbanks and alt lenders. These financial institutions offer a variety of lending options, including mortgages and personal loans. In addition, they utilise technology to provide a more efficient and effective service to consumers, posing a serious threat to incumbent banks’ dominance in the market.