The alternative finance sector currently comprises peer-to-peer lending, debt based securities and equity crowdfunding. Peer-to-peer lending falls into the FCA’s categorisation of loan based crowdfunding and debt based securities and equity crowdfunding are categorised as investment based crowdfunding.
Typically, we find investors are using alternative finance to achieve a higher return than available from a standard savings account; however this comes with higher risk.
Borrowers are using alternative finance as a source of funding as they may be unable to raise the finance through other means, or they find that the costs are lower.
The term peer-to-peer can be misleading as the investors can range from individuals to institutions, as can the borrowers.Peer-to-peer lending can be broken down into peer-to-consumer lending, peer-to-business lending and invoice finance:
- Peer-to-consumer lending is where the investors lend funds to individuals through online services.
- Peer-to-business lending is where the investors lend funds to businesses through online services.
- Invoice finance is where a business borrows funds secured against its outstanding debts from customers, with the finance being repaid as the debts are collected. This provides an element of security to investors as they will have the right to enforce the underlying debts should the borrower fail.
The online services will be either platforms or specific products (investment accounts) available to invest in online.
Debt Based Securities
In the context of alternative finance, these are unlisted securities creating indebtedness, including bonds, debentures and loan notes, typically issued by companies directly to investors at an interest rate over an agreed period.
Crowdfunding typically involves a number of investors purchasing equity in a business to provide the start-up and operating capital for it to meet its objectives.