In early December 2015, JP Morgan announced a strategic partnership with OnDeck Capital, an alternative lending company, to originate, underwrite and distribute loans specifically targeted to small businesses. The news shocked the banking world, as evidenced by a 28% single-day rise in OnDeck’s share price, and has long-term implications for alternative lenders, of which hard money lenders are a critical part. .

The association spooked many private lenders into worrying that major banks might be thinking of taking over their domains. JP Morgan’s association with OutBack seems to indicate this. Banks are already wide. Are they also going to take care of the alternative loans?

On the one hand…

Banks, such as JP Morgan, have clear advantages over direct hard money lenders. And they know it. These include the following:

Product construction. The biggest names in traditional lending institutions, such as Charles Schwab or Bank of America, can afford to give clients long-term loans and lines of credit that sometimes extend for five or more years. In contrast, alternative lenders that finance out of their own pockets can only make loans that are limited to three years at best. These suit people who are desperate for some kind of money, even if it’s short term. Banks have the advantage that their loans last longer at cheaper rates. Also, some major banks (such as Wells Fargo) recently launched evergreen loans with no maturity date. This makes it harder for hard money direct lenders to compete.

Great interest. Hard money lenders charge notoriously high lines of credit – think somewhere in the 70-80 percent range. Traditional banks, on the other hand, half of this. To put that in perspective, consider that one of Bank of America’s basic small business credit cards (MasterCard Cash Rewards) has an APR range between 11 and 21 percent, not for a term loan or line of credit, but for a credit card! Alternative money lenders may promote their business by touting their impressive speed and efficiency, but it is the high interest factor that deters potential customers. And once again the banks have the upper hand.

Borrower’s risk profile. Banks only accept applicants who are convinced that they can pay. Banks look at credit history and FICO scores to determine worth. Hard money lenders, on the other hand, get their business by taking on the most fiscally risky cases. As a result, and unsurprisingly, hard money lenders have a median default rate of 16% and forecasters predict that many more borrowers will default in 2016 as prices stretch further. In short, banks can be said to store the ‘cream of the crop’. Hard money lenders, on the other hand, tend to take the ‘cream of the shit’ (because those borrowers are the ones who generally don’t have a choice) and sometimes, though not always, lose as a result.

macro sensitivity. Just yesterday (December 16, 1015), the Federal Reserve issued its long-awaited interest rate hike. The increase is negligible (from a range of 0% to 0.25% to a range of 0.25% to 0.5%), but it comes on top of an already onerous private loan interest rate. The slight increase may add little to the banks’ impact. It adds a lot to the already high interest rate of the private lender.

Further away…

Above all, banks have access to a vast amount of data that private hard money lenders lack. Data banks include years of experience and libraries of account, expense, and risk data. Therefore, they can underwrite credit with more predictive certainty and confidence.

Banks also have diversification and connection with each other. They are a homogeneous body with access to shared information. Hard money lenders lack this. In theory, they cannot assess the creditworthiness of a single borrower based on metrics captured from a variety of products offered by the bank.

On the other hand…

This is not to say that banks are going to dominate the industry of hard money lenders and capture their business. Hard money lenders have been successful as evidenced by their growth and the industry is becoming more and more stable. Tom SEO of TechCrunch.com predicts that unconventional lenders (hard money lenders among them) will survive and may even prosper. This is due to three things happening right now:

1. Hard money lenders lowered their loan-to-value (LTV) levels – that’s huge. Until a month ago, one of the things that scared potential borrowers the most was the low LTV ratio where borrowers received a pittance for their property (as low as 50-70%). More recently, competition pushed lenders to stretch it to 80%. Some offer full percentage rates. This has gone a long way in increasing the attractiveness of the hard money lending industry.
2. Technology: Technology helps with online directories that rank lenders based on locations, loan offers, rates, and prices. Aggregation triggers bidding that encourages lenders to quick and convenient terms and sometimes more reasonable prices. The Internet also helps hard money lenders in the sense that it helps them research a customer’s background. Banks can gain access to valuable treasure troves of data. But Google (and other engines) give lenders access to unprecedented resources. These resources improve over time. Private lenders use these data resources to guide their transactions.
3. Alternative lenders who create full service solutions will survive. Tom SEO believes that private lenders that offer a “one stop shop” for all kinds of banking needs will hit the mark. By offering a range of products and services that are compatible with traditional banks, while at the same time avoiding excessive overhead and maintaining operational efficiency, these private hard money lenders could carve out their own niche and displace test banks. for a certain population.

In shorts…

So whether you’re a hard-earned direct lender or thinking of becoming one, the future isn’t all bleak. Banks, like JP Morgan, may dominate right now, but they will never displace it. You offer advantages that they don’t have and people need you.