The alternative financing industry
Like any aspect of society, the financing industry experiences fast-paced changes. Before, businesses turned to traditional financing institutions such as major banks to fund their capital expansions. However, many businesses still were unable to access this kind of financing. As such, in the past few decades, new and non-traditional financing industries emerged to address this gap. While alternative financing has been around for quite some time, it’s stepping into the spotlight nowadays because of the more stringent requirements and higher interest rates that banks are imposing. This is expected to continue for quite some time, considering that the economy has been experiencing some contractions recently, and these contractions are expected to pervade at least for the time being due to different factors. What, then, is alternative financing? What are the different funding options that businesses can consider? And lastly, what’s new with the alternative financing industry this year? Let us dive in.
What is alternative financing?
Alternative financing pertains to funding sourced from non-traditional financial institutions like a bank. Unlike traditional funding institutions, alternative financing companies have more relaxed requirements, shorter or more variable tenors, and are purpose specific.
The realm of alternative finance offers lots of advantages, especially to small businesses. It serviced the segments that traditional funders are unable to cater to due to certain restrictions, such as requirements for collateral, credit scoring, and interest impositions.
There are different funding options that businesses can explore. Each has a different offering and can suit a wide array of business needs. Here are a few examples:
- Invoice factoring – in this alternative financing, a business sells its unpaid invoices to a factoring company with a discount. Instead of waiting for the maturity date of the invoice, the business can have the cash upon approval of its application and can use it for any immediate use.
- Merchant cash advance – this alternative finance provides a lump sum payment to the business by the funder. As payment, a certain portion of the merchant’s sales made via debit and credit card shall be paid to them.
- Equipment financing – under this option, a business can buy or lease a piece of equipment, with the cost being spread out to ease the burden of payment, with the equipment itself as the collateral. That way, the business need not put up another asset or use the business itself as surety for the financing.
These are just some examples. Innovative financing options emerge in a quick fashion, driven by the need of businesses.
What is changing this new year in the industry?
While it’s true that alternative financing has been around for quite some time, we will find that this new year still has a lot in store for businesses to look forward to, may it be in the line of service improvement, or use of advanced technology.
Finance industry leaders agree that the alternative finance industry will see growth this year. With more businesses looking for alternatives to banks to fund their ventures, alternative financing will be their next option.
On the part of the funders, technology shall play a bigger role in optimizing their operations and further improving service. While there is a predicted dip in the tech industry this year, odds are optimistic that it will be overcome this year. Nevertheless, the alternative industry’s use of technology will bring more benefits to businesses and the industry.