Alternative online financing models: lending, factoring, equity, and non-investment models

One of the great advantages of the alternative financing ecosystem is its wide diversity. While bank financial products make up a closed catalog, similar to any entity, alternative financing mechanisms vary depending on the characteristics of the project and the alternative financing model is chosen. Thus, the products of a crowdequity Marketplace will be different from the services of an Invoice Market such as Inversa.

Next, we will analyze the key characteristics of the main online alternative financing models. That is, those that use Marketplaces to offer online financial products to businesses and investors. In such a way that we will not address other alternative financing channels such as Venture Capital or Business Angels, focused on investing in startups.

Online alternative financing: A growing market

According to the Center for Alternative Finance at the University of Cambridge, the online alternative finance market had a turnover of $113 billion worldwide in 2020 (excluding China). Just six years earlier, in 2015, the figure was $44 billion. So in just over five years, the market has almost tripled in size.

This trend has been underpinned in recent years by the outbreak of the global pandemic and the economic turbulence associated with the war in Ukraine and the energy crisis in Europe.

The development of innovative projects and the formation of an ecosystem of Fintechs are providing the technological support to open up alternative online financing channels to serve businesses and individuals.

Thus, in recent years there has been a proliferation of marketplaces offering online alternative financing products focused on three main types: debt, equity, and non-investment models.

According to a study by the University of Cambridge, in 2020 in Europe, crowdlending and crowdfactoring platforms will have a turnover of 8.23 billion dollars. Those focused on crowdequity products will have a turnover of 1.13 billion dollars and, finally, non-investment platforms will have a turnover of 575 million dollars.

These figures show the preponderance of crowdlending and Invoice Trading marketplaces in terms of online alternative financing.

1. Crowdlending

Crowdlending is an online alternative financing model focused on the commercialization of different types of loans.

Within crowdlending we can divide the different types of products and services into two main categories depending on how the loans requested are computed in the balance sheet: off-balance sheet non-bank loans and on-balance sheet non-bank loans. The inclusion or not of these types of loans on a business’s balance sheet affects its accounting and, therefore, its financial analysis.

Likewise, when talking about crowdlending products, we can also differentiate between consumer loans, business loans, and loans secured by real estate. In all these types of operations, investors finance the loan granted to a company or business, with the Marketplace acting as facilitator of the operations and guarantor of compliance with legal requirements.

The latter case reminds us, without a doubt, of the traditional bank loan in which a guarantor is required as a guarantee that the loan will be repaid. In this case, it would be a real estate property made available by the business that is the beneficiary of the loan.

2. Invoice Trading or crowdfactoring

About crowdlending, the business that obtains the financing contracts a debt with the investor that has provided it with the liquidity. What is agreed between both is a loan of money subject, of course, to obtaining a return.

However, in Invoice Trading or crowdfactoring, businesses do not obtain a loan but finance their invoices issued and not collected. In this way, the investor provides them with liquidity by becoming the assignee of the invoices receivable. At the same time, the business acts as the assignor of the invoices, waiving its right to collect them.

So who has to return to the saver the money he has invested? The business receives the invoice issued by the assignor.

And who is responsible for the interest and commissions of the operation? The transferor company. After all, by financing its invoices, it obtains liquidity in the short term to meet its cash needs, without having to wait for the invoices it has issued to mature and/or be collected.

This type of alternative online financing is offered by invoice markets such as Inversa, using cutting-edge technological advances to facilitate the access of savers to investment products and companies in the real economy to ways of obtaining liquidity.

In 2020, the crowdlending and Invoice Trading market in Spain and Portugal amounted to 591 million dollars. This compares with $61 million for crowdequity products and $40 million for non-investment transactions, which we will discuss below.

This article analyzes the key characteristics of the main online alternative financing models

3. Crowdequity

This online alternative financing model focuses on investment, as opposed to debt in the previous cases.

There are different types of crowdequity services. There are platforms and products focused on the purchase of shares. In such a way that investors obtain, in exchange for their money, capital issued by the company seeking financing. The purchase of shares or bonds issued by the business entitles investors to participate in the profits obtained by the company.

Another typology on the rise in the crowdequity arena is focused on investment in real estate. Thus, savers provide capital for real estate financing.

4. Non-investment

In all the models of alternative online financing that we have discussed in this article, investors obtain some kind of economic benefit. Whether it is the interest on a loan or the financing of an invoice or the acquisition of shares or rights in a company. However, as far as non-investment services are concerned, savers do not obtain economic gains.

Thus, on some crowdfunding platforms, businesses or individuals seek to obtain funding for their projects by offering, in return, a kind of reward. For example, a filmmaker can launch a campaign to finance a documentary he wants to make, and, depending on the money that each person decides to give him, he will get a different prize. From a Blu-ray copy of the film to attend the premiere.

Another type of alternative online non-investment financing is the one in which people simply donate money to a certain project, without expecting any kind of reward in return, neither monetary nor material. If we return to the previous case, the filmmaker would not offer any compensation to the people who finance his project.

In the heat of the rise of technologies and online alternative financing, microfinancing has also spread, a modality in which the profits generated by the project or the investors’ interests are re-invested. In other words, the savers who have financed the project do not receive the interest. Microcredits at very low-interest rates have also become popular, for example, to finance election campaigns.

Multiple models and platforms at the service of an increasingly diverse economy and society

The diversity of alternative online financing models we have just discussed shows how Fintechs have revolutionized the possibility for companies to obtain liquidity and the options available to small investors to obtain a return on their savings and/or support projects they feel interested in.

Society and the economy are becoming increasingly diverse. Today’s market is highly competitive and businesses must be able to have the resources to adapt to their demands, manage the transformations that occur, and win over consumers. This is why online alternative financing has become a key ally in enabling companies in the real economy to access financial products adapted to their needs and characteristics.

In such a way that online alternative financing has emerged, as its name suggests, as a new way to obtain liquidity beyond the services provided by traditional banking institutions. A way in which small investors play a key role, assuming all the power of decision on the type of projects or businesses in which they invest their money.

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