Alternative finance can generate massive funding and growth opportunities for small businesses and entrepreneurs. It has become a trending mode of achieving business finance, and the government is in complete support of this method as it can provide several finance solutions for businesses that have been on hold due to lack of funds. It is a system that emerges outside the traditional financial system. Since these financial providers are not the banks, their conditions are also not as rigid as them. The banks on one side look for businesses that have solid assets to secure the loans, but today’s businesses in the software, media, and marketing do not have such assets to apply for loans. That is where alternative business lenders provide much more flexible criteria for processing funding. There are two main types of alternative funding – P2P lending and crowdfunding.
In P2P lending, a business can approach online investors using a platform that connects both businesses and investors. The investor can lend money to a business, which should be repaid over a defined term. There is also an interest that is payable over the loan amount. On average, today, investors can earn a return for up to 4.7% of the original amount. There are several P2P lending platforms that address the needs of individuals and businesses in a wide demographic.
The main risk involved in P2P is that the borrower does not pay back the money. The P2P platforms have several risk control features like a provision fund to prevent missed payments damages. The risk, however, still persists, and the investors can never be sure if a business that they are investing in will give them the results.
Crowdfunding can be confused with P2P lending several times, but it has its own terms. Crowdfunding usually refers to a pool of investors that invest in a business under equity finance. The platforms that host crowdfunding use the right criteria to pick the businesses that are capable of reaping profits for the investors in the future. The investors receive a small chunk of equity at the business, and they can do so in multiple businesses.
There is also reward-based crowdfunding where the businesses can present their ideas and prototypes to the investors. The investors who fund the project receive several perks and rewards as investors. They can receive one of the products from the business they invest in alongside membership plans, goodies, etc. Here the investor cannot expect any financial returns. So it only works when an investor is rooting for an idea or product to work out because they were impressed.
The risk involved in crowdfunding is that the investors can invest in a business, and it may fail in the future. They may lose all their investment if they do not choose a business correctly. Since the new businesses are also highly volatile, it can become difficult for investors to access their money after investment.