Alternative financial services: AFS applies technology to improve economic activities and offer alternative modes of transactions. AFS’s are forms of finance outside the institutional finance system of capital markets and banks. These alternative financial transactions and methods help improve traditional finance methods like consumer banking, regulation management, payments and invoicing, insurance, etc.
AFS’s takes the form of microfinance in developing countries and various other layouts in developed countries such as pawnshops, car title loans, money orders, pay-day loans, etc. In NY, AFS’s are check-cashing stores, which are legally exempted from the 25% criminal usury cap.
Alternative Financial Transactions (And Alternative Finance)
The alternative finance market has grown significantly in recent years, from the financial crises recorded by various reports, especially for medium and smaller enterprises. Non-bank financial institutions provide these alternatives through crowdfunding, and person-person lending also plays a role.
AFS providers have an estimated 280 million transactions yearly, an estimate of about $78 Billion in revenues. (Including unbanked customers)
Online marketplaces’ alternative finance options include equity crowdfunding, revenue-based financing, business lending, invoice trading, alternative financial transactions, etc.
Crowdfunding is a form of crowdsourcing and refers to raising small amounts of money from a large group of people to fund a project or venture. In more recent times, you can conduct crowdfunding via the internet.
Though you can have similar concepts through benefit events, mail-order subscriptions, or other methods, crowdfunding refers to internet-mediated registries.
The modern form of this fundraising depends on three main actors; Project initiator, supporters, and moderating organization.
The project initiator proposes the project or the idea that requires funding. The supporters, who can either be individuals or groups, support the concept and may also fund or provide resources. The moderating organization offers the platform that brings the two parties- project initiator and supporters, together to launch the idea.
Though crowdfunding is highly linked to sustainability, empirical validation shows sustainability only plays a fractional role in crowdfunding.
Factoring is also referred to as invoice factoring, accounts receivable factoring, or account receivables financing.
Factoring is a mode of financial transaction that has businesses selling their account receivables or invoices to a third-party company- called a factor, at discounts.
As a business, you might be forced to sell your invoices at a throw-away price to meet your current and immediate cash needs.
Remember that though account receivables finance might also mean factoring, there is a slight difference. Accounts receivables finance may have an option of asset-based lending against the invoices.
Meaning the lending is secured by an asset; for instance, the mortgage is a type of asset-based lending.
- Revenue-based financing: RBF, also known as royalty-based financing, is a form of capital financing for growing or small businesses. The investors place an amount of capital in a company in return.
They take a fixed percentage of the ongoing gross revenues, either daily or monthly. Their payment either increases or decreases depending on the revenues of the business.
Loan repayment to RBF is usually between 3-5 years or less, depending on whether or not you have paid the initial capital amount or not, plus where they
Equity crowdfunding, also known as investment crowdfunding, crowd equity, or crowd investing, is part of capital markets- financial markets selling and buying long-term debts or equity-backed securities.
Therefore, equity crowdfunding offers a group of people private company securities to invest in via online means. In other terms, crowdfunding enables many investors to cash in their money into startups or other small businesses in return for equity.
These investors give business owners money and, in return, attain a small portion of the business. When the business enterprise succeeds, the shares go up together with its value; vice versa also applies.
Equity crowdfunding is subject to financial and security regulations because it often involves commercial enterprise investments.
Business lending and peer-peer consumer
- Peer-peer lending: P2P is a practice of lending money to businesses or individuals through online services that match borrowers and lenders. P2P companies offer their services online to lower their overhead costs and provide cheap services than traditional financial institutions.
These companies aim at providing increased returning rates to their lenders while keeping a low return interest rate to their borrowers, even after they have taken their fees for providing the matchmaking platform.
However, the borrower risks failing to return the money once taking it off the platform.
Many peer-peer lending’s do not have any sort of security though the major percentage is lent to businesses. But you can also have a secured loan where you use assets such as jewelry, fine art, buildings, watches, vintage collection, etc., as collateral.
Lenders or competing lenders have the option of setting the interest rates in an auction process on these platforms. Even if it is an auction, the lenders still consider the borrower’s credit history.
You can also venture into peer-peer fundraising that encourages a non-profit organization or charity to raise money individually.
The below are alternative finance instruments:
Cryptocurrencies, crypto-currencies, or cryptos are collections of binary data that serve as a medium of exchange- items exchanged for goods and services. A digital ledger stores individual ownership records to verify coin transfer ownership, control other creation of coins, and secure transaction records.
Cryptocurrencies are fiat currencies since they cannot be converted into or backed up by commodities. Owners put up their tokens as collateral in a proof-of-stake model, and in return, they own a more stake proportional to the amount they staked.
Social impact bond
Also known as social benefit bond, pay-for-success bond, or simply a social bond, it is a form of outcome-based contracting. Social impact bonds stem from partnerships that improve social outcomes for a specific group of citizens.
SME minibonds are structured financial bonds under the control of the Lehman brothers and issues in Hong Kong and Singapore. Together with minibonds and other notes issued by Lehman Brothers, these notes are sometimes known as ‘Lehman-related securities.
Unlike the minibonds with three-layered structures, the SME minibonds have only two layers of notes bundles.