Why it’s time to stop searching for the silver bullet of SME financing

In 2024, it’s not exactly radical to suggest we stop thinking of alternative financing as the new kid on the block.

Although the industry is significantly younger than, say, Barclays or HSBC, the sector as a whole has reached a certain level of maturity.

In recent years, alternative lending in particular—sometimes referred to as non-bank lending—has grown beyond the realm of plucky upstart, gained real momentum and demonstrated its staying power.

This has been a long time coming. As early as 2018, The Economist noted that nearly half of housing loans in the US market originated from institutions outside the traditional banking industry. PayPal small business loans jumped from 40 000 businesses served in 2015 to 225 000 in 2019.

A 2021 survey conducted by Cambridge University found that the alt finance market volume “grew consistently” in Europe from $1,5 billion in 2013 to $23,2 billion in 2019.

Even more recently, a report published by Grand View Research predicted the global alt-lending platform market size will reach $14,47 billion by 2030.

All of this is good news on its own and likely a good sign for the future. From my perspective, much of it has to do with the improvements and product expansions that alt lenders have been able to implement and incorporate into their lending products.

It wasn’t so long ago that the only place you could get a collateral loan, for instance, was with a traditional finance institution. Those days are gone.

To stretch that example just a little further, the introduction of collateral lending has been a boon to the alt-lending companies specifically focused on servicing small- and medium-sized enterprises (SMEs).

A funding gap only underscores the main factors that have made it possible to begin with, including how traditional banks are leery of taking on the risks inherent to SME lending. In other words, SMEs aren’t the kind of surefire bet these institutions prefer.

This funding gap and traditional institutions’ hesitancy to close it has created an opportunity within alt finance at large that alt lenders have seized with both hands.

But Rome wasn’t built in a day, and alt lending didn’t have the kind of capital it needed to fill this gap and service these SMEs overnight. Expansion and innovation has been — and still is — incremental.

But it is happening, and one of the milestones has been the widespread incorporation of collateral lending across the alt-lending sector.

Collateral lending can provide SMEs with the capital they need not just to stay afloat but meaningfully grow.

Collateral lending is not, however, a silver bullet: It's not the magical product that will shake up the market, close the funding gap, and make alt lending compete head to head with traditional finance.

For starters, it requires SMEs to have collateral, such as real estate or another asset.

Even though alt lenders tend to be more inclusive in their view of what constitutes collateral assets, it doesn’t change the simple fact that not all SMEs have assets to bring to the table.

That’s why alt lending depends so much on other methods. Take factoring, in which companies without collateral can obtain investments based on the strength of their buyers.

Factoring depends on having strong buyers. What constitutes a strong buyer depends but a standard example would be a multinational corporation that agrees to contract a given SME to act as a supplier.

That’s how factoring becomes a viable option for SMEs without traditional collateral.

Collateral, factoring, even the more standard and far less trendy business loans—from my perspective, all these must continue to take up equal space within alt finance. no one lending product, however hyped, however new, however exciting, is going to be the silver bullet or golden ticket—pick your analogy here.

Alt lending cannot lose the forest for one particularly exciting tree, and it’s only a continued dedication to a combination of options that can get this industry to where it’s going. Maybe this isn’t the most glamorous suggestion, but it’s the key.

How do we keep alt finance moving in the right direction? We expand and improve the more basic, old-school offerings like collateral lending, as opposed to chasing new features and innovation. The innovation should happen within existing factoring and collateral services, for instance, by way of broadening the criteria we accept as collateral. The only way we position ourselves as a viable alternative to traditional banks is to offer many of the same services they do, only smarter.