Alternative Finance: Overview

Alternative Finance refers to services that provide access to finance through non-traditional financial institutions (i.e. banks).  It offers a convenient solution at higher level of transparency and control.

Below are some of the Alternative Financing products that are currently available in the market:

Peer to Peer Financing

What is it?

Businesses obtain loans from number of individual investor (each lending a small amount) via an online platform.  The investors receive a from the Business based on the agreed rate.  P2P business lending facilitates both secured and unsecured loans.  The interest rates are set by Investors based on the borrower’s credit worthiness.

When to use it?

It is suitable when business seeks for a small capital injection to their business to boost working capital to facilitate cashflow, growth and expansion

Invoice Trading

What is it?

Invoice Financing is when a business sell their outstanding invoice(s) / accounts receivable to investors via an online platform at a discounted price to obtain cash immediately rather than waiting for their vendor to pay on the due date.  Invoice trading platform then collects payment on the due date and disburses accordingly to the Investors and SMEs.  It allows businesses to convert their unpaid invoices into cash up front and ease the business’ cash flow challenges.  Usually, the business receives between 70%-90% of the invoice values up front.

When to use it?

Invoice Trading is suitable when cash flow is required to fuel the growth of the business.  This can be done on a regular basis without impacting the credit rating or balance sheet.

Equity Crowdfunding

What is it?

Equity Crowd Funding is when a business sells a stake of company’s equity via an online platform to a number of investors in return for investment.

When to use it?:

This type of Alternative Financing is suitable when substantial amount of funding is required to support business seed / start up, growth and expansion.

Alternative Finance Character

From analysing the above, the common characteristics among Alternative Finance can be summarized as:

  • Conducted via an online platform by alternative finance companies, processes are usually automated with minimal intervention.
  • Businesses can control the products and services they would prefer to utilise and are often able to set their own prices.
  • Allows businesses to connect to a large pool of investors to obtain relevant funding (rather than tie up to a single bank).
  • Provide finance solutions to support business growth and expansion, in case businesses are not able to finance through traditional bank method due to their strict criteria and policies.

Based on the UK study by Nesta, it is found that businesses have seen a variety of positive impacts.

  • Three–quarters of those that received funding through equity crowdfunding launched a new product or service after funding rounds.
  • 70% of SME borrowers of P2P business lending have seen their turnover grow with 63% of them recording a growth in profit.
  • A third of the businesses which raised funds via P2P business lending or invoice trading, reported that they would have been ‘unlikely’ or ‘very unlikely’ to get funding elsewhere.

Obtaining finance from the traditional sources is now more difficult than ever. With the rise of alternative lending, choosing /exploring the right Alternative Finance product will help grow your business.

Nalinee Chinowuthichai is the co-founder of InvoiceInterchange, Singapore’s invoice trading platform, where SMEs can flexibly manage their cash flow by selling invoices to a network of investors who compete to provide cash advances.

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