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The deep dive: Alternative finance

By Puja Sharma

November 10, 2022

  • alternative credit
  • alternative finance
  • Alternative Lending
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alternative financeThe deep dive’ is our bi-weekly exploration of a relevant topic, hot trend, or new product. For Prime subscribers only.

How does it work?

Capital can be accessed by business owners through alternative finance sources other than traditional sources. To sustain further expansion, your business will need investment during its growth phase. While the traditional route of securing a business loan from a high street bank appears, on paper, better suited to a small business, there is a lot of red tape.

There may be difficulties demonstrating a trading history and forecasting cash flows for newly established businesses. In this way, SMEs can bypass the restrictions imposed by high street banks while getting growth capital from the alternative finance market.

Equity crowdfunding

By investing in an early-stage private company (not listed on the stock market), the crowd acquires shares in the company. Investing in a company can provide shareholders with profits if the company is successful.

The most common form of crowdfunding is donations-based crowdfunding, which involves looking for donations from the community for a particular cause – usually a humanitarian cause. An example might be supporting refugees of war or a relief fund for a recent disaster.

Asset finance

As a financial service, asset finance has two main types. Asset refinance is one method of obtaining financing against assets, which uses valuable items on your balance sheet as collateral.

The other type of asset finance includes equipment leasing and hire purchase, specifically designed to fund new and used assets like machinery and vehicles.

Peer-to-peer lending

Through P2P lending (or “P2P”), people with investment funds can provide direct funding to business owners. The lender earns a return from the principal issued through interest payments in return for assuming the risk of a payment default.

Who is under the radar?

P2P lending, as a significant component of the larger FinTech sector, is quickly becoming the most popular alternative investment option. It quickly transforms India into a credit-inclusive society while also providing investors with one of the most promising asset classes. In this regard, of all the recent FinTech disruptors, P2P lending is by far the most creative. With its unique provision of tech-enabled solutions spanning onboarding underwriting and disbursement, P2P lending platforms can meet such demands.

P2P lending refers to a method of online financial arrangement between individuals and businesses without involving banks or financial institutions. People can borrow loans at low-interest rates and flexible terms from this source of funding, which is easily accessible. It facilitates quick and easy loan applications with minimal documentation and no impact on credit scores.

Why does it matter now?

The global peer-to-peer (P2P) lending market reached a value of $112.9b in 2021. Looking forward, IMARC Group expects the market to reach $525.3b by 2027, exhibiting a CAGR of 28.1% during 2022-2027.

In the top assets ranking, alternative investment instruments give way to traditional ones due to their simplicity and high volatility of the latter. At the same time, P2P lending ranks third in the aggregate of all factors, having proven itself to be a profitable and reliable asset.

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