What is the Alternative Finance Market and Why Should you Care?

The rising need for alternative funding sources has driven the rise of alternative finance solutions to foster collaboration between those who have funds and those who seek funds outside of the conventional financial methods. 

Since the last major financial crisis, traditional institutions have abruptly chosen to lend less, especially to small and medium-sized enterprises (SMEs), lowering their exposure to risk and debt. As a direct result, small businesses are more likely to have trouble acquiring external funding during times of crisis because they lack access to the debt and equity capital markets.

Such individuals soon began to search for other funding sources as a result of these banking and financial issues. This is where the rising demand for alternative finance solutions comes into the picture, as a way to foster collaboration between those who have funds and those who seek funds outside of the conventional financial methods. 

How does alternative finance work, and what are the implications concerning businesses and investing parties with interest in participating in such options?

Related: 5 Things to Note Before Raising Funds for Your Business

What is alternative finance?

The term “alternative finance” refers to financial activities that are not part of the capital markets and banking system. 

The term “Fintech” is directly related to alternative finance, referring to the ecosystem that consists of businesses, technology, and procedures that work to enhance current financial practises in areas like payments and invoicing, consumer and small business credit, international money transfers, equity financing, and crowdsourcing among other things. 

In its simplest form, alternative financing refers to financial services and goods created mostly outside of the conventional, tightly regulated banking and capital market sectors and frequently made available to consumers through digital platforms, tools, and systems. 

The market category primarily concerns itself with online financial services for corporate clients. Over the years, alternative financing operations have seen a generally upward trend on a global scale.

What advantages does alternative finance offer?

For one, the process of raising money has become much simpler and faster thanks to alternative finance. 

Alternative finance providers are frequently well suited to the needs of smaller companies and startups looking to grow, not only because they can offer less stringent criteria than conventional lenders like banks but also because they can be more adaptable and responsive while offering first-rate customer service. 

For example, crowdfunding, like what Ethis Group provides, has become increasingly popular over the last few years and is a viable option to take into account for small businesses as well as startups. 

Despite the fact that crowdfunding is frequently linked with raising money for startups, months of limitations and lockdowns have led to many small firms choosing crowdsourcing as a solution to resume regular operations. 

Alternative finance also sets itself apart with characteristics like shorter application forms, minimal documentation, nearly no collateral requirements, minimal credit score criteria, high approval rates, and quick funding—even for demands relating to cash flow and asset financing.

Who can participate in alternative finance?

Regardless of credit history, alternative financing is offered to corporations, individual consumers, non-profit organisations, and even specific altruistic or philanthropic purposes like paying for someone’s unplanned medical expenses. Money can be given as a donation, trade, or reward (such as the financier receiving a product in lieu of equity or repayment), as well as debt (such as the obligation to repay), or debt-free. 

The cost of the money (such as the interest rate or equity price) is frequently comparable to or even less expensive than the price from traditional finance sources. Borrowers with poor credit, however, often pay very high costs and should exercise caution.

What’s more, these new alternative finance lenders are significantly less picky about who they will lend to than the banks; they are a lot more accommodating.

The banks simply don’t comprehend some business concepts. Traditional banks search for companies with reliable assets they can use to secure a loan against, like real estate or equipment. Alternative lenders for businesses are significantly more accommodating. 

These new industries are often better understood because they are online enterprises themselves. This describes a large portion of the consumers on these platforms who couldn’t get the financing they needed from a bank.

Some examples

1. P2P (Peer-to-Peer Lending)

Peer-to-peer Lending, often known as P2P or PtP lending, operates similarly to platforms for “invoice trading,” putting investors who lend money on one side and businesses who require funding on the other. 

To connect the two communities, the finance provider only offers a website and credit-checking service. Investors frequently provide capital to businesses so that operations can operate smoothly on a regular basis, and peer-to-peer business lending has now become a very well-liked method of business financing.

2. Crowdfunding

In the context of alternative finance, the phrase “crowdfunding” typically refers to equity financing that is raised online from a group of investors.

The companies that offer this type of financing typically review the businesses that apply and select the most appealing business plans to highlight on their platform. The possibility to invest a little amount of equity gives investors the chance to spread their risk across a variety of enterprises at the same time.

3. Trading Invoices

This is different from invoice financing, invoice factoring, or invoice discounting, which you may have heard of.

Instead of committing clients to lengthy contracts, invoice trading platforms fund firms against specific invoices. It’s known as “invoice trading” because it uses an online “peer-to-peer” network to link companies selling invoices with investors financing against those invoices.

As a result, getting the cash flow you need to continue doing business is quicker and simpler than with traditional credit providers.

Why should you care?

The alternative finance market is projected to continue its growth trajectory while some experts believe that APAC will dominate this space. 

Accessibility is a core component objective when it comes to the processes behind alternative finance. The options that exist outside of tough conventional banking prerequisites are going through interesting developments that seemingly act to improve efficiency, security and trust of such alternative platforms. 

This means that more small businesses will be able to find the financing they urgently require to resume or expand operations in some way, and the economic engine comprising SMEs stand to gain from such alternatives. This can also initially work to reduce disparity in lending prospects.