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When it comes to Artificial Intelligence, there is much speculative investing going on, which we don’t recommend. That doesn’t mean we don’t invest in AI opportunities that benefit investors today. One of those opportunities is the Alternative Lending market which applies artificial intelligence and cloud-based computing to serve borrowers better. This method of borrowing is becoming mainstream quickly and is benefiting all those involved.
In the past, small business owners had only one option when applying for a business loan – their local bank or credit union. Traditional bank lending typically relies on deposits from customers in the form of savings. They have more stringent loan approval processes that comprehensively evaluate a borrower’s credit history, financial statements, collateral, and other factors.
Instead, alternative lending often involves non-bank financial institutions, individual investors, or peer-to-peer lending platforms that connect borrowers directly with lenders. Alternative lending platforms employ advanced technology and data analytics, enabling them to assess loan applications more quickly than traditional lenders. This can result in faster approval times, allowing borrowers to access funds in a shorter period. Alternative lending can be a viable solution for individuals or businesses needing immediate financing for time-sensitive opportunities or emergencies.
Benefits to Investors
This efficiency can also translate into faster loan origination and quicker investor returns.
Higher returns: Alternative lending can provide investors with the potential for higher returns than traditional investment options. Since alternative lending platforms often target borrowers who may not qualify for conventional bank loans, they tend to charge higher interest rates to compensate for the increased risk. This higher interest can translate into attractive returns for investors.
Access to different markets: Alternative lending allows investors to access markets that were previously difficult to reach or required significant capital. For example, peer-to-peer lending platforms enable individuals to invest in consumer or small business loans, traditionally only available to banks. This access to different markets can broaden investors’ investment opportunities and increase their chances of finding attractive investment options.
Diversification: Alternative lending allows investors to diversify their investment portfolios beyond traditional asset classes like stocks and bonds. By allocating a portion of their investments to alternative lending, investors can reduce the overall risk in their portfolio and potentially enhance returns by tapping into a different source of income. The following correlation matrix demonstrates how alternative lending provides diversification.
Reduced reliance on traditional financial institutions: Alternative lending allows investors to participate in lending activities without relying solely on conventional financial institutions like banks. This can be advantageous, especially during times of economic uncertainty or when traditional lenders may tighten their lending standards. Investors can still earn income from lending activities through alternative lending platforms, even if banks are cautious with their lending practices.
It’s important to note that alternative lending carries risks, including borrower defaults and platform-specific risks. This is why we have carefully selected security that conducts thorough research and due diligence. We are currently using LENDX for exposure to this unique investment space.
As with most alternative investments, investing in alternatives is a costly undertaking. While even 1.5% is not low relative to typical mutual funds or ETFs, it is cheap relative to the fees charged by other providers in the alternative space. In addition, investors need to be aware that this is a different type of vehicle/asset class, as you are not investing in public securities.
LENDX has performed as expected since its inception seven years ago, particularly during the market downturn when traditional borrowing (as evidenced by the Bloomberg US Aggregate Index) struggled.
While this asset class has been a newer addition to our portfolios when we began to use it in 2020, we continue to monitor and communicate with LENDX management to ensure it is appropriate for our portfolios. This is not a mutual fund and can only be purchased by an advisor as an “institutional” purchase. We do not recommend this fund for do-it-yourself retail investors.