Alternative Finance or Alt Finance refers to financial services and products that exist outside of traditional financial systems such as banks and capital markets. It include peer-to-peer (P2P) financing, crowd funding, revenue-based financing, and so on.
Alternative financing provides Individuals flexibility and variety of options. This has made alternative financing a very popular option among startups and small business owners in both the B2C and B2B spaces in recent years.
How does alternative financing work?
Small businesses and startups often face issues when it comes to securing financing from traditional institutions. They have to deal with people with little to no knowledge about their business, costing them vital financing aid that could help them grow their business. Moreover, traditional banks follow long, drawn-out decision-making processes which again discourage small businesses and startups from joining them in business.
In such cases, Alternative finance is a great option, offering credit to companies who were previously underserved without the hassle and bureaucracy of traditional financial institutions. This is all part of the growing demand for financial inclusion at every level, making sure small businesses and startups have access to financial products and services that meet their specific needs.
The growing demand for inclusive financial practices has also brought with it plenty of alternative financing options to choose from.
What are the different examples of Alternative Finance options in India?
Previously, many small businesses and startups found it difficult to access credit since investing in them was considered risky. Thanks to alternative financing options, founders, who were ineligible for credit earlier, now have access to different lending options that meet their needs, like:
- Invoice financing
Invoice financing provides businesses quick access to credit using unpaid invoices as security. They pay a certain percentage of the invoice as a fee to the lender. It lets businesses create smooth cash flows without any delays in payment.
Although relatively young compared to other financing options in the list, crowdfunding is slowly growing in popularity in India, especially in the medical expenses and social impact businesses. Crowdfunding relies on marketplaces that allow businesses to connect directly with the consumer and generate funds for business operations and endeavors.
- P2P lending.
The P2P lending model is similar to that of crowdfunding. It connects lenders with businesses and offers flexibility to both in terms of access to funds and choice. Businesses and financing partners can connect directly to share resources on their own terms. P2P financing partners may be individual investors, companies, or both.
- Lines of credit.
Lines of credit are available via both traditional financial institutions and alternative finance options. However, traditional routes place certain limitation on credit, unlike alternative finance companies with less strict rules in terms of loan amount and withdrawal limits.
- Term loans.
Term loans are simply loans given for a fixed time period for a specific amount. They are similar to bank loans but provide an advantage to the business compared to traditional loans as their terms are negotiable and the interest is tax deductible. However, their interest rates may be higher than the traditional loan.
- Revenue based financing.
Revenue-based financing is a credit model which provides funds to startups and in return take a percentage of their gross revenue. Businesses get access to capital upfront, reduce the cost of managing cash, and invest in growth initiatives. Revenue-based financing works best for SaaS companies where there is a strong gross margin.
How is it expected to grow in India in 2023?
Currently valued at $6.62 billion, the alternative finance sector in India is the third largest in the world and is expected to grow by 20 percent in the next year. This rising acceptance of alternative financing options is driven by increasing digital adoption, access to more financial data, and product expansion, which will push the overall goal of financial inclusion.
With advances in Artificial intelligence, Machine Learning, blockchain, and more, alternative finance companies will be able to deliver faster, more flexible, and secure services to the masses. Moreover, alternative financing platforms will present themselves as a viable investment option for the individual.
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