Member Article

What is Alternative Lending?

Increasingly, everyday borrowers and commercial customers are setting their sights on the UK’s ‘alternative’ lending sector. Disenchanted by the difficulties faced in accessing affordable support on the High Street, more people than ever before are taking their business to alternative lenders.

But what exactly is alternative lending and how is it advantageous over the products and services of major banks?

What is Alternative Lending?

In short, the term ‘alternative lending’ applies to any financial product or service that differs from the mainstream products issued by High Street banks. Alternative lending differs from conventional lending in that it is typically tailored to suit the exact requirements of the borrower. Where an individual or business may not meet the criteria set out by major banks and lenders, they may be able to qualify for a bespoke solution with an alternative lender.

Put simply, alternative lending is designed to provide a flexible, accessible and affordable alternative to the more ‘generic’ products and services available on the High Street.

How Does it Work?

Alternative lending works differently from mainstream lending, in that it focuses on a borrower’s broader financial positions. On the High Street, it can be practically impossible to qualify for any type of financial product with a low credit score. With alternative lenders, eligibility is assessed on the basis of a much broader range of factors.

Examples of these include the applicant’s employment status and income level, availability of assets of value (security) to cover the costs of secured loans, current business performance (in the case of commercial products), and evidence of a workable exit strategy to repay the loan.

Consequently, applicants with poor credit or even a history of bankruptcy can still qualify for alternative financial products. This includes those who have been turned down on the High Street, or refused outright on the basis of ‘binary’ eligibility checks.

What Are the Different Types of Alternative Lending?

The beauty of alternative financial products lies in their bespoke nature. All products are tailored to meet the exact requirements and budgets of the individual borrower, in accordance with their financial circumstances at the time.

Even so, most alternative funding solutions issued in the UK fall within one of three major product categories:

1. Bridging loans

A bridging loan is a specialist type of secured loan, issued over the short term to cover a temporary financial gap. Bridging loans can be taken out starting from £10,000 and up to £10 million or more, secured against assets of value (typically the borrower’s home or business premises). A bridging loan can be authorised and accessed within a few working days, and is designed to be repaid within 6 to 18 months.

This makes bridging finance ideal for taking advantage of time-critical purchase and investment opportunities, or for covering unexpected business costs.

2. Buy-to-let mortgages

Buy-to-let mortgages are specialist mortgages for landlords and investors looking to buy properties to rent out to tenants. Some types of BTL mortgages are available on the High Street, but those from alternative lenders are significantly more flexible, accessible, and potentially affordable.

A BTL mortgage can be effectively ‘bolted on’ to a bridging loan, enabling investors to pick up residential properties at low prices and repay the balance gradually over several years.

3. Development finance

Similar to bridging finance, development finance is a fast-access, short-term facility with bespoke terms and conditions. The difference is that with development finance, the funds can only be used for property developments, construction projects, renovations, and so on.

Development finance is typically issued exclusively to experienced developers with an established track record, with no upper limits on how much can be borrowed. The funds raised by way of development finance are issued over a series of installments, tied with the completion of major project phases.

This was posted in Bdaily's Members' News section by iCONQUER Ltd .