The alternative financing boom is on its way to consolidate. There is life beyond banks. There are more and more entities such as FinTech and neobanks that offer financing possibilities without having to set foot in the office. The increasingly digitized global environment is pushing these long-term trends focused on other formulas for raising capital. Jason Simon, an expert in the financial sector, discusses how these alternative sources are starting to become much more prevalent today.
The concept of alternative financing refers to ways of raising (financed) capital that is outside the institutional system of banks and capital markets. On the other hand, the FinTech ecosystem refers to technology companies that aim to improve the methods and procedures of traditional banking. In this sense, many FinTechs are focused on offering consumer loans and credit, small business loans, wealth management, savings and investments.
“In short, alternative finance is any type of business finance that does not come from a conventional provider such as a commercial bank,” explains Simon. “Conventional finance is great for many businesses, but banks often have criteria that smaller businesses sometimes can’t meet and need other options.”
In the past, it was difficult to find suppliers for alternative financing and they may have had a specific product or sector in which they specialized. Today, there are a wide variety of firms available (such as FinTechs) and dozens of products, so you can find the financing that best fits each profile.
There are examples of common products within alternative financing 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 moved close to $3 million in Europe last year.
In the last decade, a large number of FinTech companies have emerged that offer alternative financing to their customers through different options. Simon has outlined the best alternative financing options to avoid having to go through the bank.
First of all, there is P2P lending. Peer-to-peer (P2P) lending allows you to obtain credit directly from other individuals, eliminating the financial institution as an intermediary. “Entities that facilitate this form of financing have greatly increased their adoption as an alternative method,” says Simon. “P2P is also known as social lending or group lending. In these cases, the lender receives interest and gets the money back when the loan is repaid.”
Some FinTechs specialize in connecting companies seeking financing with various individuals. Typically, this involves investors keeping a small percentage of the company’s equity (equity crowdfunding) or users who lend money get interest on the amount pledged.
The idea is to create a mutually beneficial arrangement for both parties. The company gets easier access to funding and lenders, or investors can support small businesses and diversify their portfolio without having to use an entity as an intermediary.
Online installment lending is the most common type of business loan. Broadly speaking, they all work in the same way: the lender and the business agree on an amount, an interest rate and a time frame for repayment.
There are different forms of online installment loans in alternative commercial financing. For example, some require personal or security guarantees, while others are based more on credit rating or business history.
“Another avenue of alternative financing offered by FinTechs are home equity loans,” Simon points out. “This is a loan in which the customer pledges as collateral for payment of the transaction of a property owned.”
This means that the bank or FinTech has the possibility of enforcing its rights over the property in the event that the customer does not meet the payment commitments. This financing method is usually used by people who are looking for quick capital to take advantage of an investment opportunity or because they need liquidity to meet certain economic needs.
And then there is invoice financing, which is an excellent way to speed up the inflow of liquidity. The lender buys the unpaid invoices and that means an immediate inflow of capital for the borrower. However, using this tool means that the borrower forgoes a portion of the amount of the debt that was originally due to him in the form of a fee. Most of these invoice advances are carried out in the form of factoring.