By Vineet Agrawal, Co-founder, Jiraaf
We are living in an era where inflation has led to an increase in the cost of living, without a proportionate rise in incomes. Thus, effectively, even if you are earning the same salary every month, your purchasing power keeps going down month-on-month. Consequently, there are many foreseeable or emergency needs that force people to seek debt. It could also be short-term capital needs for self-owned businesses. Essentially, the needs are diverse, but traditional options to get debt are very few, and come with their own challenges.
Even when banks do offer short-term loans, they need guarantee or collateral. In addition, banks also require to ensure that the borrowers have a healthy credit score. If that’s not the case, you may not get a loan even if you are willing to pledge a collateral. In such scenarios, raising funds for a short duration, or for a specific activity could become a tedious and time-consuming process. More often than not, people fail to get the desired loans.
Newer funding options
However, thanks to a larger investor market, favourable regulations and technological advancements today, there are alternative debt options available to individuals to meet their needs. Let’s take a look at the scenarios available for individuals seeking loans for personal or business purposes.
Growing a business
You might own a small business with a steady revenue, but you might need to expand the business or introduce new products and services to stay relevant in the market. Alternatively, you might have a great business idea for a startup, but loans from financial institutions and VC funding are not available for it. In such scenarios, you can opt for alternative debt options such as peer-to-peer lending or startup investments from an alternative fund. The fund managers would undertake a due diligence of your financial situation, need, repayment ability and past credit history. If nothing amiss is found, they are likely to offer you debt on convenient terms for short or mid-term durations.
Asset leasing is another option for individuals seeking to set up businesses in verticals such as manufacturing, offices, warehouses, shops or vehicles for operations. In this scenario, the asset is owned by investors or alternative investment funds, and they lease it to the individual for use on a rent basis. In fact, nowadays, you might even find such leased assets for personal usage such as housing needs from investors who have created real-estate alternative funds.
Personal financial needs
For needs that are of a personal nature, but are not taken care of by the personal loans offered by banks, you can opt for peer-to-peer lending from alternative investment platforms. They undertake similar due diligence as they would for a P2P lending for business, but in this scenario, the rates of interest and the payment terms might vary. There could also be options of securing debt against mortgage of a property or other assets by individuals seeking the loans. In some cases, when the loan amount is very small, the lenders also tend to offer loans against salary after ascertaining that the person is regularly employed and is capable of paying back as per the repayment terms and schedule.
Until very recently, individuals seeking financial assistance had to rely only on the enterprise financial institutions such as banks or NBFCs for their personal needs. The extensive due diligence and stringent processes deployed by institutions resulted in either the individuals not getting the loans or the process being too long and tedious. Alternatively, they had no option, but to get trapped by traditional moneylenders who charge abnormally high interest rates, and whimsical loan terms.
With the evolution of fintech enterprises and digital platforms in India, concepts like peer-to-peer lending, mortgage or asset financing are now emerging as a ray of hope for individuals. It is possible to get quick, affordable, and convenient debt from such platforms, and this is going to be the future of personal lending in the years to come.