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Change is groundbreaking for some industries. For instance, who in the music business could have predicted that a platform as seemingly innocuous as Napster would forever change the way people consume and experience music? Who in the news media could have predicted
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that a social networking site like Facebook would one day become a primary source
of information for millions of people?
Whether it’s a young, innovative upstart that offers a better product at a better
price, or an unforeseen macroeconomic event that disrupts entire business models,
change is the one constant in the business world.
Tracing direct lending’s roots
There’s a simple reason that traditional lenders control so much
lending activity: They sit in the middle of the flow of capital.
Imagine how people went about getting a loan in the days
before banks. You could ask your family members or neighbors and try to scrounge up enough capital to meet your
needs. You could ask a wealthy local businessman, who
would likely ask something of you in return.
What if your family and friends didn’t have any money to
spare, however? What if the businessman asked for some-
thing you couldn’t deliver? You might walk around the entire
village asking everyone you know until someone said “yes.”
The problem with this early form of direct lending is a conflict
of desire: A borrower who needs to borrow a certain amount
of money for a certain period of time must find a lender willing
to lend that amount of money for that period of time. This
process, human beings realized fairly early on, is incredibly
inefficient. So, they created a better way — the fractional-
reserve banking system.
Instead of forcing everyone to find their own capital, early
financiers created a system that could match the needs of
gating the supply and demand of capital to make sure that
businesses have access to funds and savers are able to earn a
return on investment.
Technology opens doors
Thanks to the internet and the rise of alternative lenders — which
include technology-enabled direct lenders, nonbank lenders and
marketplace lenders — the process of matching savers and borrowers
has become faster, easier and more transparent.
Instead of waiting weeks or even months for a bank to make a decision
on a loan application, for example, borrowers using tech-enabled alternative
lenders can often apply in just 10 minutes and receive a decision in as little as
24 to 48 hours. Many of these lenders also offer online deal trackers or managers,
allowing mortgage brokers and borrowers to see the real-time status of their loan
applications or payments. This resulted in an improved customer experience
and, ultimately, more deal flow.
Today, practically every lender uses technology in some aspect of its business,
whether to evaluate potential borrowers or track customer behavior. But increasingly, it’s the alternative and nonbank lenders who are setting the standard for
what the lending experience should look like, and it’s why they are beginning to
capture a significant percentage of the commercial real estate market.
Recession sparks retrenchment
Every good story needs a climax, and in the story of alternative lending, that
moment is the global financial crisis. As markets crashed worldwide, traditional
lenders tightened their balance sheets and all but eliminated their various forms
of lending out of fear that the whole system was about to coming crashing down.
According to Federal Reserve data, commercial and industrial loans issued
by all commercial banks peaked at almost $1.58 trillion in November 2008.
Lending volumes plummeted over the next two years, however, dropping by
one quarter to about $1.19 trillion in November 2010.