The rapid popularity of Alternative Finance is responsible for the major disruption taking place across the whole lending regime.It’s no longer safe for banks to assume that their core lending regimes are impervious to disruption. Click To Tweet
Alternative to what, exactly? The banks.
Alternative Finance encompasses a range of diverse models with clear distinctions such as people lending money to each other or to businesses, to people donating to community projects and businesses trading their invoices. It’s no longer just a seeding stage for startups, but a viable and attractive avenue for companies to raise capital at every stage of the funding cycle.
The C-Word & Alternative Finance
In an earlier post, FinTech 2.0 and the C-Word: Collaboration, I talked about how it’s increasingly becoming evident that banks are willing to support startups to innovate within the banks’ ecosystem. Likewise, the reality is that the coexistence of venture capital and alternative finance has now developed collaborative and synergistic models. And these models are rapidly increasing as banks and venture capital firms realize the scope of alternative finance.
What are the various European alternative finance models?
The European Alternative Finance landscape is dominated by the UK with France and Germany slowly catching up. This is in part due to the dedicated regulatory regime that currently exists in the UK. Listed below is a working taxonomy of the various alternative finance models:
- PEER–TO–PEER (P2P) BUSINESS LENDING – Debt–based transactions between individuals and existing businesses which are mostly SMEs with many individual lenders contributing to any one loan.
- DONATION–BASED CROWDFUNDING – Individuals donate small amounts to meet the larger funding aim of a specific charitable project while receiving no financial or material return in exchange.
- INVOICE TRADING – Companies sell their invoices at a discount to a pool of individual or institutional investors in order to receive funds immediately rather than waiting for invoices to be paid.
- PEER–TO–PEER (P2P) CONSUMER LENDING – Individuals using an online platform to borrow from a number of individual lenders each lending a small amount; most are unsecured personal loans.
- COMMUNITY SHARES – The term community shares refers to withdrawable share capital; a form of share capital unique to co-operative and community benefit society legislation. This type of share capital can only be issued by co-operative societies, community benefit societies and charitable community benefit societies.
- EQUITY–BASED CROWDFUNDING – Sale of a stake in a business to a number of investors in return for investment, predominantly used by early–stage firms.
- PENSION–LED FUNDING – Mainly allows SME owners/directors to use their accumulated pension funds in order to invest in their own businesses. Intellectual properties are often used as collateral.
- REWARD–BASED CROWDFUNDING – Individuals donate towards a specific project with the expectation of receiving a tangible (but non–financial) reward or product at a later date in exchange for their contribution.
- DEBT–BASED SECURITIES – Lenders receive a non–collateralized debt obligation typically paid back over an extended period of time. Similar in structure to purchasing a bond, but with different rights and obligations.
The European alternative finance market grew by approximately 144% in 2014 and is predicted to reach €7 billion by the end of 2015. Three things have contributed to this trend: Speed, Simplicity and Transparency.
While structural risks such as interest rate hikes, potential new regulations overhang, frayed banking relationships, and other unforeseen factors could derail the trajectory that Alternative Finance is on, we predict 2016 will be the year of alternative finance.
What are your predictions for alternative finance? Leave a comment below.