Long after the word “recession” stopped populating media headlines, the various forms of alternative, non-bank financing have continued to generate a more mainstream appeal , and this trend is only going to get stronger as the millenial generation continues to mature. This is good news for the alternative business finance industry, since this trend will likely lead to an increase in the number of young entrepreneurs and business owners in need of start up financing or a business loan.
Millennials represent one of the biggest demographic sectors in the U.S. Yet, according to a recent Bankrate survey, this group seems to be less active in traditional credit and financial markets. Among 18 to 29 year olds, 63 percent don’t have a credit card, and 33 percent are considered “under–banked.” This is compared to the 35 percent of adults 30 and over who don’t have credit cards.
Why is this happening? Many industry experts point out that after the recession, most banks severely tightened their lending standards and have yet to go in reverse. On top of this, millennials tend to have inconsistent income as a result of temporary employment, self-employment, career changes, or because they have started their own business. They come off looking financially unstable- to the banks at least. These trends, in addition to new financial regulations, such as the Credit Card Act of 2009, have made it much harder for millenials to obtain a credit card and thus begin to build their credit profile.
So, it’s not that millenials aren’t looking for credit. Many are; they just can’t get approved for it.
This opens the door wide for alternative lenders, particularly those that operate online. Many of these alternative online lenders, which include micro lenders, p2p platforms, and for business owners, and assortment of asset and revenue-based financing arrangements, rely proprietary algorithms to help them quickly determine who is fundable and how much of a financing risk a given borrower presents. Instead of looking primarily at a prospective borrower’s FICO score, these lenders consider other factors, such as financial account activity and in some cases even a borrower’s social media circles.
As the millenial generation of entrepreneurs and small business owners gets ever more comfortable accessing financing online instead of heading to their local bank, and as the banks continue to keep the funding pipeline closed, we should see even more players entering the field. There is little doubt that the alternative financing landscape will look vastly different ten years down the line- so different, that alternative finance may well be the new traditional.