Shadow Banking Soars with Non-Bank Alternatives/Financial Technology (“FinTech”) Enables Online Lending and Crowdfunding

As banks face tougher regulations and restrictions, which often result in greater difficulties and red tape for borrowers, consumers and businesses, large and small, are often seeking alternative sources for loans or lines of credit. Enter the private lending industry, sometimes considered to be “shadow banking,” which in the simplest terms means lending by any institution or entity other than a bank, such as small business-focused lender, hedge funds or private equity funds.

On the plus side, shadow banking sometimes affords customers more favorable terms on loans such as higher amounts or longer periods (perhaps a 10-year loan term as opposed to three-year) or securing a loan with less collateral than that required by banks. On the negative side, shadow banks are subject to less regulation. Regardless of the risk, shadow banking is responsible for trillions of dollars in global loan transactions each year.

Lending Club (www.lendingclub.com) is an online marketplace where institutional investors put up funds for loans to consumers and small businesses that complete simple applications online. The site uses proprietary software to evaluate the borrower’s answers and determines interest rates for each loan as well as fixed monthly payments and flexible terms. There are no prepayment penalties. OnDeck Capital (www.ondeck.com) is a non-bank lender focused on serving small businesses. Lenders of this type are of growing interest to business owners.

Other shadow banking examples include firms that finance leases for vehicles, industrial equipment and aircraft, such as AerCap Holdings, which owns over a thousand jetliners that it has leased to the world’s airlines. Toyota Financial Services is another private, specialized lender. It provides lending and leasing services for Toyota automobiles and trucks for consumers and businesses.

Hedge funds and private equity funds have become massive non-bank lenders, as has a type of corporation known as a Business Development Company. These types of lenders provide short- to mid-term business loans and leases. In return, they not only charge substantial interest rates on their loans, but also may receive stock warrants enabling them to acquire an ownership position in the borrowers under certain conditions.

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Shadow Banking Soars with Non-Bank Alternatives/Financial Technology (“FinTech”) Enables Online Lending and Crowdfunding, Business and Industry Trends Analysis

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