The alternative finance sector currently comprises peer-to-peer lending and 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 less.
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 and debt based securities) available to invest in online.
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.