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If there's any doubt about the growth of alternative lending, look no further than the IPO market.
For the second time in two weeks, an alternative lending company has gone public. New York City-based OnDeck Capital rose in its debut earlier Wednesday on the the New York Stock Exchange. OnDeck Capital's shares opened at $26.50, and touched a high of around $28.
That's well above $20 the stock priced at late Tuesday. That level surpassed the forecasted range of $16 to $18. Based on late Tuesday's pricing, OnDeck Capital raised about $200 million from its IPO, valuing the firm at about $1.32 billion.
OnDeck Capital caters specifically to small businesses, and does not allow peer-to-peer investments. Instead it partners with distributors, from financial institutions to independent sales groups, to connect businesses to capital. Since its launch in 2007, OnDeck has deployed more than $1.7 billion in small business loans to 25,000 businesses in more than 700 industries.
Separately, Lending Club, a marketplace or peer-to-peer lender and among the largest in the industry, also went public last Thursday on the NYSE, pricing above the initially forecasted range of $15 and continuing to climb throughout the day.
Lending Club CEO Renaud Laplanche said on CNBC's "Squawk on the Street" that the company has the opportunity to transform the entire banking system, "making it more transparent, more cost efficient, more consumer friendly."
Both Lending Club and OnDeck illustrate the growth of the alternative lending market, despite low interest rates.
OnDeck Capital is currently in its quiet period before going public and declined to be interviewed for this story. The company offers loans from $5,000 to $250,000 with terms of between three and 24 months. Decisions can be made in "minutes" and payback rates vary. Loan rate examples include $.017 cents on the dollar for a $25,000 loan over six months; and $0.33 cents on the dollar for $57,000 loan over 18 months, according to its website.
Jeff Stibel, chairman and chief executive at Dun & Bradstreet Credibility, a global insights firm, says alternative lenders are becoming more appealing because small companies know they can get cash quicker.
"We keep calling these 'alternative lenders,' and we need to stop because demand is up for these loans and they're becoming mainstream," Stibel says. "With both Lending Club and OnDeck, I see it as a sort of Christmas miracle for small businesses. Seeing these companies succeed means small businesses succeed as well."
Dun & Bradstreet Credibility collects quarterly data with Pepperdine University on small business lending. Their research found a continued uptick in demand for alternative lenders. Sixty-two percent say the current business environment makes it difficult to secure new financing.
The nonbank financial system is estimated at $3.2 trillion in the U.S. and $15 trillion globally, according to the Bank for International Settlements. Foundation Capital, a venture capital firm, estimates the global peer-to-peer lending industry alone will reach $1 trillion by 2025.
Quick cash, while appealing to small companies, isn't without its risks. The shadow banking industry isn't regulated, and fees can be high, Stibel of Dun & Bradstreet Credibility warned.
"There's no question you have to be incredibly careful which loan and lender you take from. In general the loans tend to have higher interest rates, and the payback period tends to be quicker," Stibel says. "But for a lot of businesses, these are better than not being able to grow, or going out of business."