Alternative Finance Explained

Alternative Finance Explained

Below is an explanation of the various forms of alternative finance:

Peer to peer lending – online

An individual will apply for a loan for various reasons
The platform will credit score the individual and accept or decline the individuals application
The amount and credit score of that individual will be put to the auction
Many individuals will bid to lend that individual small amounts of money at varying interest rates
The most competitive bids will be accepted and the weighted average rate for the full amount offered to the individual
The individual accepts or declines the offer of the money
On acceptance the funds are transferred to the individual’s bank account

Peer to SME lending – online Invest and Fund area of expertise

An SME will apply for funding
The SME is credit scored and put through the underwriting/internal credit committee for approval
The SME is accepted or declined
On acceptance the SME prepares a ‘sales pitch’ to appear on the auction market place
The ‘sales pitch’ will include why the company requires the money, history of the company, financial details, description of the company and a Q&A facility.
Individuals bid to offer money to the company, when the amount of finance is raised other investors can still enter the auction but must bid lower rates than already offered
Once the auction process is ended the company will be offered the finance at the average interest rate that has collectively been offered by all the individuals
The company has a cooling off period were they can accept or decline the money
If accepted the monies are transferred to the company’s bank account within hours
The company then makes monthly repayments over the predetermined period of capital and interest until the loan is paid off
The platform will then distribute the interest and capital to all the successful individuals at the various interest rates obtained by them

Peer to SME equity funding – online

The SME will go through the same process as with peer to SME lending with regards to credit checking
The fund raising process is similar with a live auction
The company instead of taking out a repayment loan will offer an equity stake in the business in exchange for the finance required
The amount of equity being offered and amount of funds required to purchase that equity will be set by the company.
Once the amount raised has been reached the auction closes
There is the advantage of SEIS and EIS tax relief on some of the companies
The investor generally holds the stake until the company floats gets taken over or buys the shares back
The lack of liquidity is not for everyone

Peer to property funding – online

The financing of mortgages by individuals
Security taken via charge on the property
Loan to value expressed as a %
Bids are made by individuals for part of the mortgage or set interest rate offered over set periods by the platform and investors select period of loan with corresponding fixed interest rate.
Size of investment may be too large for some.

Invoice trading – online

The business applies online as a ‘seller’ and after credit scoring by the platform, provides the invoice it intends to raise finance against
A number of investors bid to advance the money to the ‘seller’ of the invoice, with the most competitive bids (lowest interest rate) ensuring the most competitive rate.
The funds required are moved to the business bank account within hours of the bidding process closing and the ‘seller’ accepting the terms of the finance offered
When the business is paid by their customer, the business pays back the money plus any fees due.

Asset Based Lending

Finance secured on assets, such as debtor book, plant and machinery or property.
Invoice Financing is the most common form of asset based lending and in most cases acts to support the business to manage cash flow, bridging the gap between the delivery of goods or services by a business and the payment from its customer.
Businesses using this type of financing tend to be high growth businesses. Businesses often find this type of financing flexible as the borrowing grows in line alongside the sales ledger.
ABL is suitable for businesses which have business to business sales.
Barriers to ABL have been caused by the perception that it is the finance of last resort.
Banks are now recruiting heavily in this field!

Business Angels

Business angels tend to be high net worth (HNW) individuals who invest in early stage or high growth businesses, either directly or through organised networks and syndicates
Business angels tend to have substantial knowledge and experience of growing businesses and can act as mentors.
Angel investment is suitable for seed or early stage companies looking for their first or second stage of external funding to grow rapidly

Private Equity

Private equity firms provide medium to long term funding in return for an equity stake in the unquoted business with a high growth potential
The investor returns are dependent on the growth and profitability of the business thus most PE will want to work alongside the business to help growth
PE investment is most suitable for companies looking for longer term capital to fund their expansion

Supply Chain Finance

SCF is a way that large companies can use the strength of their balance sheet to support their suppliers, who are generally smaller and often SMEs.
SCF’s work by allowing a supplier to sell its invoices to a bank, or another finance provider, at a discount once they have been approved by the buyer.
Instead of relying on the creditworthiness of the supplier, the bank or finance house deals with the buyer, who is often a less risky prospect.

Useful Links:

www.thefundingcentre.com – Has all the major platforms and points to the most suitable
www.altfi.com – Industry news and commentary
www.businessfinancecompared.com – Find and compare different sources of finance

Invest and Fund Ltd

Telephone: +44 (0)1424 717 564

Chichester Road, Ponswood, St Leonards-on-Sea, East Sussex TN38 9BG