The alternative financing boom is about to consolidate. There is life beyond the banks. More and more entities such as FinTechs and neobanks are offering financing opportunities without having to set foot in the office. The increasingly digitized global environment is driving these long-term trends focused on other forms of capital raising. jason simona financial industry expert, explains how these alternative sources are starting to become much more prevalent today.
The concept of alternative financing refers to the means of raising (financed) capital outside the institutional system of banks and capital markets. On the other hand, FinTech ecosystem refers to technology companies that aim to improve the methods and procedures of traditional banking. In this sense, many FinTechs focus on offering consumer loans and credit, small business loans, wealth management, savings and investments.
In short, alternative finance is any type of business financing that does not come from a conventional provider such as a commercial bank, Simon explains. Conventional finance is ideal for many businesses, but banks often have criteria that small businesses sometimes cannot meet and need other options.
In the past, it was difficult to find alternative finance providers and they might have a specific product or industry that they specialize in. Today there is a wide variety of companies available (like FinTechs) and dozens of products, so you can find the financing that best suits each profile.
There are examples of common products under alternative financing, such as P2P loans, online personal loans or 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 nearly $3 million to Europe last year.
Over the past decade, a large number of FinTech companies have sprung up and are offering alternative financing to their customers through different options. Simon outlined the best alternative financing options to avoid having to go through the bank.
First, there is P2P lending. Peer-to-peer (P2P) lending allows you to get credit directly from other people, eliminating the financial institution as the middleman. Entities that facilitate this form of financing have dramatically increased their adoption as an alternative method, Simon says. P2P is also known as social lending or group lending. In these cases, the lender collects interest and gets the money back when the loan is repaid.
Some FinTechs specialize in connecting companies seeking funding with various people. Typically, this involves investors keeping a small percentage of the company’s equity (crowdfunding) or users who lend money earning interest on the pledged amount.
The idea is to create a mutually beneficial arrangement for both parties. The business gets easier access to financing and lenders, or investors can support small businesses and diversify their portfolio without having to use an entity as an intermediary.
The online installment loan is the most common type of business loan. Basically, they all work the same way: the lender and the company agree on an amount, an interest rate and a repayment period.
There are different forms of online installment loans in alternative business financing. For example, some require personal or security guarantees, while others are based more on credit rating or business history.
Another alternative funding route offered by FinTechs are home equity loans, Simon points out. It is a loan in which the customer pledges as security for the payment of the transaction of a property owned.
This means that the bank or the FinTech has the possibility of asserting its rights on the asset in the event that the customer does not respect the payment commitments. This mode of financing is generally used by people who are looking for capital quickly to take advantage of an investment opportunity or because they need liquidity to meet certain economic needs.
And then there’s invoice financing, which is a great way to accelerate the influx of cash. The lender redeems the unpaid invoices and this means an immediate influx of capital for the borrower. However, using this tool means that the borrower waives a portion of the amount of debt that was originally owed to them in the form of fees. Most of these invoice advances are made in the form of factoring.
About Jason Simon
Jason Simon is a fintech and digital payments expert who got involved with cryptocurrencies when they were first introduced. He is enthusiastically following what is happening in the changing world of finance, excited about the prospects that digital currencies offer to global consumerism. 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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