What is Alternative Finance?

Apr 12, 2018 Blog  Alternative Finance

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Claire McCloskey from Carson McDowell recently published a very simplistic explanation of the different alternative finance structures.  Below follows a summary of her article:

What is alternative finance?

Alternative finance is effectively “non-bank lending” or “private debt”.  It can be separated into alternative funding providers and alternative finance products, such as bonds and loans.  On these loans the terms may vary from traditional debt structures.  There has been an increase in alternative finance recently and this was caused by the perceived gap between bank-supply and borrower-demand.  Banks have had to decrease their financial leverage following the recession and were also driven by regulatory capital controls, which led to “conservative” lending practices.  This made way for alternative finance opportunities, especially in certain sectors or with certain assets where the absence of bank lenders reflects a longer-term shift in credit policy.  The evolution of alternative finance was also motivated by technological innovations such as peer-to-peer lending and crowdfunding platforms.

Peer to Peer Lending (P2P)

Peer to peer lending is the process of lending money to individuals or businesses through online services, matching lenders to borrowers.  It is frequently used by SME’s seeking funding and can be used to finance a wide range of business needs.  On P2P platforms, investors obtain a return based on the interest the borrower pay and the platform collects the repayments from borrowers and passes them to the investors.  Borrowers are credit-checked and rated according to risk.  This rating signifies the likelihood of the borrower going into default.

Crowdfunding

Crowdfunding is a way in which people, businesses and other organisations can raise money through online platforms.  The party seeking funding will pitch an idea online and request funding in return for a one-off reward, an interest-yielding return or an equity stake.  Funding is typically raised from a large number of people, each contributing small amounts.

Angel Investors

Angel investors are private individuals who invest their personal capital in start-up companies, in return for an equity stake.  Investment is not limited to funding – angels usually have experience with other business, or their own and useful contacts.  They would usually require an equity stake and some degree of control over the investment or the investment company.

To read the full article, click here.

Image: Babu Raja via Flickr (CC 2.0resized)

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