Our lives are marked by the choices we make among multiple alternatives. Some of them are very important, for example, which university degree to study or which vocational training course to take? Others are more inconsequential: which brand of milk should I buy? Which restaurant should I order pizza from tonight? The basis of any good choice is the quality of the alternatives before us. This is true in the personal sphere, but also the business sphere. This is why the era of alternative financing is opening up a wide range of opportunities for businesses. Since they no longer have to finance themselves through traditional banking institutions. They now have a multitude of alternatives to make the decisions that best suit their needs.
We are all aware that choosing from a handful of similar options is not the same as having a diverse and interesting range of alternatives at our disposal. As far as financial products are concerned, the era of alternative financing brings with it a multiplication of products and services available to both companies and investors. Mechanisms that are also able to better adapt to the characteristics and needs of savers and businesses.
We will now dive into the era of alternative financing, paying special attention to its three main players: investors, companies seeking financing, and the cutting-edge technology projects that have made the emergence and consolidation of the alternative financing era possible.
A brief definition
First of all, we should provide a sort of definition of a concept as broad and complex to define as alternative finance.
The Centre for Alternative Finance at the University of Cambridge defines alternative finance as a field that includes digital financial activities, located beyond the traditional banking system and capital markets and conducted online.
This pioneering think tank adds that the alternative finance ecosystem includes diverse lending, investment, and non-investment models to enable individuals, businesses, and other types of organizations to raise funds in a digital marketplace.
This definition gives us the keys to what are the platforms that support the era of alternative financing and the importance of technology in this process.
Beyond the banking wall
So far this century, digitalization has spread to all areas of society, strongly impacting the way businesses operate.
The financial sector has not been oblivious to this global dynamic. Traditional institutions have taken steps to digitize their business models, such as, for example, banking apps. But, in turn, the expansion of the virtual world, the rise of the internet of things, and the commitment to developing cutting-edge software have opened the doors to other players such as Fintechs, which have become standard bearers in the era of alternative financing.
According to the research center specializing in this area at the University of Cambridge1, the online alternative finance market in Europe (including the UK) had a volume of $1.5 billion in 2013. Eight years later, in 2020, its volume amounted to 22.6 billion, of which 692 million had been generated in Spain and Portugal. Although the covid-19 pandemic slowed down the expansion of this market, its growth is expected to continue.
Because of the above, the era of alternative financing has broken the monolithic control that banks had over corporate financing mechanisms. Banks remain hegemonic, but it is undeniable that Fintechs have made inroads and the era of alternative finance has brought with it a more diverse and broader market.
Multiple investors, multiple funding possibilities
If there is one defining characteristic of the alternative financing era, it is the multiplication of investors, and people and businesses that can obtain financing for their purposes.
Thanks to projects like Inversa Invoice Market, a saver can invest in a business without leaving the couch. In the Marketplace, you will have all the information about the profitability you are going to get, the terms of return on investment, or the credit rating of the company you are going to finance.
All at the click of a button.
So you can directly manage your investments, make more, or analyze their evolution. From your own home, without having to go to a bank or contact a manager. This allows us to point out that these financial services stand out for their permanent availability and functionality.
Thus, digitalization and technology make it easier for thousands and thousands of small savers to invest the amount of money they want, even if we are talking about small amounts, and to get a return on their hard-earned savings.
On the other side of the relationship, we find people and businesses that have within their reach an infinitely wider range of financial products and services with which to obtain liquidity and be able to start up or consolidate their projects.
The era of alternative financing brings with it the democratization of investment and financing. People invest in people.
Fintech: Technology spearheading the era of alternative financing.
The third type of player to which we should pay attention is undoubtedly Fintech. Companies that, as their name suggests, combine technology and finance to launch marketplaces offering products and services in line with alternative financing models.
Fintechs thus acts as a sort of «cicerone» that brings cutting-edge software and technological solutions to the table to bring together the interests of investors and companies.
Without the implementation of these innovative projects, the era of alternative financing would not exist. Innovation has enabled the emergence of this type of model, designed to enable savers to invest their money beyond the traditional market and companies and individuals to obtain liquidity without having to rely solely on an increasingly concentrated banking sector.
Strengthening the real economy
One of the core values of the alternative finance era is the commitment to ethical investment. In other words, savers seek to invest their money in projects that are consistent with their values, objectives, and interests.
Such is the freedom that investors have when it comes to selecting the projects in which they invest their savings, in which companies or people they trust, that the ethical dimension has become relevant. As opposed to the bank manager who was entrusted with a sum of money to invest, in the era of alternative financing, investors can be their managers, assessing all the variables to be taken into account on a case-by-case basis. From profitability to the destination of the investment, including, without a doubt, the security of the operation or its terms.
In addition, alternative financing models have proven to be extraordinarily valuable mechanisms for promoting the real economy. Why? Small and medium-sized companies can turn to platforms such as Inversa Invoice Market to obtain liquidity. They don't have to be large companies. Different types of businesses can access financing. From the flour supplier of a bakery in our neighborhood, to the SME in the industrial park of our town that manufactures parts for a multinational that builds cars.
And investors can choose in which companies they invest their money, choosing to support real economy projects and contributing to strengthening the local productive fabric. At the same time, they get a return on their savings with maximum security and in a short period.
In short, the era of alternative financing brings with it a paradigm shift that puts cutting-edge technology at the service of investors and companies. A new way of thinking and practicing investment and financing.
1 The 2nd Global Alternative Finance Market Benchmarking Report (2021). Cambridge Centre for Alternative Finance. University of Cambridge Judge Business School. https://www.jbs.cam.ac.uk/wp-content/uploads/2021/06/ccaf-2021-06-report-2nd-global-alternative-finance-benchmarking-study-report.pdf