Alternative Finance is an umbrella term that covers any type of finance that does not come from a mainstream provider. As a result of the 2008 financial crisis, the popularity of alternative finance has increased significantly year on year. Banks have found it increasingly difficult to lend due to ever more restrictive credit policies and this has meant the alternative finance industry has experienced rapid growth. The 3 most popular types of Alternative Finance are covered below.
Peer-to-peer lending, often referred to as “crowd-lending”, is the term used to describe online financial matchmakers which pair together borrowers and lenders without the involvement of a traditional financial intermediary. Successful P2P platforms include Funding Circle, LendInvest and Funding Knight, where lenders are able to choose between a variety of potential borrowers. The lenders benefit from the interest generated from the loans whilst borrowers are given access to finance they would have been unlikely to receive from traditional means. P2P Lending falls into 2 broad categories: P2P Business Loans and P2P Consumer Loans.
2. Crowdfunding is the practice of funding a project by raising monetary contributions from a large number of people.
- Equity based Crowdfunding raises capital in return for shares in a company, predominantly start-ups.
- Reward based Crowdfunding typically gives the lender the opportunity to receive a tangible reward or incentive in exchange for the finance provided.
- Donation based Crowdfunding raises money for a charitable project, receiving nothing in return.
3. Invoice Trading facilitates the sale of a company’s invoices at a discount to institutional investors via an online auction. The invoice is bought and the firm receives an immediate cash advance of typically 80-85% of the invoice value. When final payment is received from the debtor, the invoice trading company rebates the balance of the invoice after having deducted their fees.