As a mortgage and/or finance broker, what do you understand by the term ‘alternative finance’?
For some people, it just means conventional loans from non-bank sources. Others view the term with suspicion, or think of new-fangled fintech formulations that are not for them or their clients.
In fact, the term is something of a misnomer – or better said, a tautology: all funding methods are alternatives to each other, and each has its strengths and weaknesses. Technicalities aside, though, the point is that alternative funding is no longer niche. It has proved its worth in both business and personal finance in the last decade and has earned its place in the mainstream finance mix that any good broker should consider when advising a client.
Why is Alternative Finance so Popular?
Many forms of alternative finance have been around for a very long time, and have been popular before. In fact, invoice finance has been used since at least Roman times and therefore pre-dates the banking system by centuries.
However, the bank loan for buying a business or a home, became so popular in the twentieth century that most people forgot about other funding options. This was a shame, because some of these alternatives offered real advantages to a straight loan in terms of flexibility, availability and even cost.
On the other hand, finance requires trust, so it is not surprising that people chose to stick with the security of big, secure banks. That situation changed considerably with the financial crisis. However, the reason people have flocked to alternatives since the crash has more to do with their availability than any notional loss of trust in the incumbents.
With less bank finance available, alternative finance filled the gap. Using new fintech methods and consumer-friendly interfaces, it offers increasingly tailored solutions to businesses, consumers and homeowners.
In many ways, alternative finance has filled the gap in demand left by the crash and subsequent tightening of lending criteria. In doing so, it has performed a very useful economic service and truly earned its place in the mainstream.
Alternative Business Finance
It is now more than a decade since the financial crisis and although Australian business has recovered admirably, the availability of loan funding has not. This is not to say, however, that SMEs cannot get the cash they need: a new array of so-called ‘alternative’ funding providers mean there are now more options than ever before for business funding.
Brokers have a key role to play in helping their clients access this funding, which can often run side-by-side with a bank loan. After all, we all want to help Australian businesses get the cash they need to grow.
For example, what do you as a broker do if a client wants to raise money, has a great business plan full of potential, but no security or track record. You know at a glance what the bank will say, because they are bound by regulation. Yet it is crucial that the financial community supports small businesses with good growth potential.
Solutions to this situation from the ‘alternative finance’ corner could be trade finance, if the business imports their raw materials or complete product from overseas and debtor finance2. The former works well for businesses that don’t have sufficient capital to pay their factory upfront before the product arrives in the country. Such wholesale growth businesses, need a finance company to help pay the factory so that the goods can be imported and then sold in order for the business to collect their cash and pay the funder back for funding the imports.
The latter is great for businesses in a range of industries from wholesale to manufacturing through to transport & logistics, with good clients but these clients take 30 to 60+ days to pay their invoices. Invoice or debtor finance as its often referred to, allows the company to access cash immediately from their invoices issued. This money can then be used to pay wages, rent and other operating costs as well as to purchase more products to sell, without having to wait the 30-60+ days until their client/s pay their invoices. All this without the need to provide property security.
The Role of Brokers
Alternative finance has proven its credentials, it is very cost effective and can help fill a significant gap between demand for funds and what banks can offer. In many cases, these alternatives can be better than a loan. However, for the individual, and even the SME business owner, the array of funding on offer is daunting.
What better role for the broker or adviser, than to provide a full service which guides clients towards the best funding options?