Alternative Finance presents new funding options for small businesses in the information age - Blog - Ki Solutions Financial Advisors

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Alternative Finance presents new funding options for small businesses in the information age


Alternative finance is technically defined as financing through non-traditional sources and has been around for a while given that businesses have traditionally relied on banks for funding but occasionally turn to other finance sources when credit tightens. This is intensified during economic downturns and notably among the more vulnerable small businesses. Therefore, demand for alternative finance grew among small businesses during the credit shortage that followed the 2008 financial crisis. Now, in the aftermath of the financial crisis, it is a fast-growing industry which leverages on the networking power of internet and social media, drawing inspiration from the emergence of the peer-to-peer (P2P) economic activity, to connect fundraisers directly to funders through various online technology-enabled channels and platforms. There have been many classifications that don’t fit into discrete mutually exclusive categories and they often overlap since it is still very new and dynamic, gaining traction and changing in form as several new initiatives to connect small businesses to funders surface. Based on popularity, the main variations for businesses so far are P2P/marketplace/social lending, Crowdfunding and Invoice trading.

They all share the essence of eliminating the need for banks to intermediate the transactions by having an online marketplace connect fundraisers to funders in exchange for fees and cover a wide range of participants that goes beyond the low risk-low yield end of the spectrum that banks usually operate in. It is worth noting how powerful the newer technologies are in making alternative finance more accessible to less sophisticated investors - as exemplified by the far reach of crowdfunding. Following the 2008 crisis, banks lost competitiveness due to stricter regulation on capital requirements and people have been increasingly skeptical of banks. This has made the online marketplace concept more appealing and platforms have been very competitive because of how they developed new more-effective tech-based methods of evaluating creditworthiness of fundraisers (ex: data-driven algorithms) based on new metrics. Also, they are competitive as online businesses with lean structures, which are more cost-efficient then, for example, the banks' costly branch networks. Their operational efficiency coupled with different criteria for funding that relies less on collateral shortens their decision processes and enables them to move faster when underwriting. So, they are appealing in terms of accessibility, collateral requirements, quickness, approval rates and sometimes cost as well. For funders, these new forms are also appealing as new investment options with higher yields and diversification, especially for risk-taking investors. On the downside, loose regulation adds risk to these new forms but there have been developments towards creating an appropriate regulatory framework since the Jumpstart Our Business Startups ("JOBS") Act first regulated these new forms of alternative finance in April 2012. Currently, P2P lending is the most popular of these in the U.S. and crowdfunding has been very popular as well.

Online alternative finance won’t displace banks in the post-recession world but these new intermediaries in small business financing are here to stay as welcome additions to a mix of small business financing that has been over-reliant on bank loans. This new alternative finance can also be strategic in improving business growth by complementing its role as an additional funding source with non-financial support, such as means of stimulating digitalization and entrepreneurship or as a powerful marketing tool. Whether you are a discouraged borrower or simply haven’t applied for external financing, your small business should benefit from having access to a diversified set of financing options. A lot of young firms with high growth potential have already adopted alternative finance and Ki Solutions can help your business navigate the new economy by preparing your business plan accordingly, so you can improve your high-level decision-making, and seek out funds from various sources of capital, including online alternative finance, so you can fully benefit from using finance instruments other than straight debt.

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