The alternative financing boom is gaining traction. There is life beyond the banks. There are more and more companies like fintech and neobanks that offer financing options without having to set foot in the office. The increasingly digitized global environment is driving these long-term trends that focus on other capital raising formulas. Jason Simonan expert in the financial sector, explains how these alternative sources are becoming increasingly important today.
The term alternative financing refers to ways of raising (financed) capital outside of the institutional system of banks and capital markets. On the other hand, the FinTech ecosystem refers to technology companies aiming to improve the methods and procedures of traditional banking. With that in mind, many FinTechs are focused on providing consumer loans and credit, small business lending, wealth management, savings and investing.
In short, alternative finance is any type of business finance that doesn’t come from a traditional provider like a commercial bank, explains Simon. Conventional financing is great for many businesses, but banks often have criteria that smaller businesses sometimes can’t meet and need other options.
In the past, alternative finance providers have been difficult to find and they may have had a specific product or industry that they specialize in. Today there are a multitude of companies (e.g. FinTechs) and dozens of products, so whatever your profile, you can find the funding that suits you best.
There are examples of common products within alternative finance such as P2P loans, online personal loans or equity crowdfunding. As an example of the interest generated by this financing option, a recent study published by the University of Cambridge showed that alternative financing in Europe hovered near US$3 million in the past year.
In the last ten years, a large number of FinTech companies have emerged that offer their customers alternative financing via various options. Simon has outlined the best alternative financing options to avoid going to the bank.
First of all, there is P2P lending. Peer-to-Peer (P2P) lending allows you to get loans directly from other people, eliminating the financial institution as an intermediary. Institutions that facilitate this form of funding have greatly increased its acceptance as an alternative method, says Simon. P2P is also known as social lending or group lending. In these cases, the lender earns interest and gets the money back when the loan is repaid.
Some FinTechs specialize in matching companies looking for financing with different people. Typically these are investors who keep a small percentage of the company’s equity (equity crowdfunding) or users who lend money earning interest on the amount pledged.
The idea is to create a mutually beneficial agreement. The company gets easier access to financing and lenders, or investors can support small companies and diversify their portfolio without having to use a company as an intermediary.
The online installment loan is the most common form of business loan. Broadly speaking, they all work the same way: the lender and the company agree on an amount, an interest rate, and a time frame for the repayment.
There are different forms of online installment credit in alternative commercial financing. For example, some require personal guarantees or security guarantees, while others are more based on creditworthiness or business history.
Another avenue of alternative financing offered by FinTechs is home equity loans, Simon points out. This is a loan where the customer puts up a security to pay for the transaction of their own property.
This gives the bank or FinTech the opportunity to enforce their rights to the property if the customer fails to meet their payment obligations. This funding method is typically used by people who are looking for quick capital to capitalize on an investment opportunity or because they need liquidity to meet specific economic needs.
And then there’s invoice financing, which is a great way to accelerate cash inflow. The lender buys the outstanding bills and this means an immediate cash inflow for the borrower. However, using this tool means that the borrower waives part of the original debt amount in the form of a fee. Most of these invoice advances are carried out in the form of factoring.
About Jason Simon
Jason Simon is a fintech and digital payments expert who was involved with cryptocurrencies when they were first introduced. He is passionate about what is happening in the evolving world of finance, excited about the prospects that digital currencies offer to global consumption. When he’s not involved in advancing the digital payments space, he enjoys spending time with his family and improving his community.
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