The AltFi Frontline: Where do the limits lie?

When AltFi.com first began, just over a year ago now as a humble news provider, we had a clear idea of our core areas of focus: peer-to-peer lending, equity crowdfunding and online invoice finance.

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“AltFi” is, of course, an abbreviation of the often-used expression: “alternative finance”. And in the many months that have passed since launching, it’s become increasingly clear that “alternative finance” is an unusually flexible term – meaning very different things to many different people.

In our book – at least initially – an alternative finance platform had to meet these basic stipulations:

  • It had to be social – i.e. entail some element of peer-to-peer exchange

  • It needed to feature a dynamic marketplace of some kind

  • The platform had to operate online

  • It couldn’t be a bank

These criteria encompassed such familiar platforms as Zopa, RateSetter, Prosper, Lending Club, Funding Circle, MarketInvoice, Crowdcube, Seedrs – and all of the many hundreds of earlier-stage outfits that have followed in the footsteps of these first and second movers. This version of the “alternative finance” space is more than busy enough to keep any news provider fully occupied.

But my question today is this: just how broadly can the phrase “alternative finance” be applied – and which businesses fall within its potential reach?

The easiest way to work towards the limits of the expression is to identify the types of businesses that do not fit AltFi.com’s original criteria – and yet which can nonetheless make a case for being an alternative finance provider. These companies do not necessarily fit within the peer-to-peer lending, crowdfunding or online invoice finance brackets – but they unquestionably represent an alternative avenue via which small businesses and individuals are able to fund specific types of operation. Let’s list some examples:

TradeRiver Finance and Trade Finance Partners operate within, as you might have guessed, the trade finance space. In other words, whereas platforms like MarketInvoice are funding the sellers of invoices, these companies are providing funding at an earlier stage in the supply chain – the point at which an order is made. Now, these two businesses work very differently. TradeRiver funds buyers in order to allow them to make swift payments to suppliers. Trade Finance Partners instead purchases the ordered goods itself and then delivers those goods to the buyer on behalf of the supplier.

Each of these very different operations could in theory be financed by an online crowd of private investors – but they are not. Instead, transactions are funded via arrangements with a small number of institutions and/or banks. As such, not only is there no retail money at play, there is also no marketplace to play on. You cannot gain access to real-time, online investment opportunities via either of these companies. The same can be said of Crossflow Payments – which also operates within the supply chain finance space and which, according to its website, has processed £1.3bn of invoices.

Do these missing ingredients exclude TradeRiver Finance, Trade Finance Partners and Crossflow Payments from the alternative finance spectrum? It’s an important question – because those same ingredients are missing from the majority of the above-listed companies.

Fleximize and Liberis hail from a fast-growing niche within financial services entitled “revenue-based finance” – or “merchant cash advance”, as they say Stateside. Both platforms can extend facilities to small businesses in need of working capital. These unique debt instruments are repaid according to the cash flow of the borrowing business, and repayments can be as regular as daily. If, for instance, a pub owner has taken out such a facility – he or she will repay a proportionately higher amount of the loan when business is booming, and commensurately less in a down-month. Again though, these funders do not feature a marketplace for peer-to-peer exchange, and there’s no way for the man in the street to get in on the action.

Then we come to the balance-sheet lenders. I’ve selected the US-based OnDeck and the UK’s George Banco in order to showcase representatives from both the business and consumer funding sectors. Through enhanced technology and online underwriting methods – these companies can get credit advanced to SMEs and consumers incomparably faster than traditional providers. But like the rest of the companies on this list, they tick neither the “social” nor the “marketplace” boxes.

How about a company that functions exactly like a peer-to-peer lending platform – but offline? That’s what you have in Sancus Limited – which enables high net worth individuals in the Channel Islands to lend to local SMEs (although in truth these “SMEs” are generally much more “medium” than “small” in scale). The Ideas Factory offers a similar product within the equity crowdfunding space – parading early-stage investment opportunities to a network of equity investors. What’s missing from both structures is a dynamic online portal via which their investors may bid upon the latest offerings.

What are we to do with this impressive array of funding providers? Is there any reason that we shouldn’t look to broaden our definition of “alternative finance”?

You can see why these sorts of businesses – some of which have in fact been around since before the advent of the term “alternative finance” – are now keen to jump aboard the bandwagon. The industry is garnering a heap of media attention and perhaps even more institutional interest.

But the soundness of the logic for broadening the term “alternative finance” to encompass a wider range of providers depends entirely upon the angle one takes. If I were a business owner in need of money, there’s simply no arguing that each of the outfits touched upon above represent a viable yet unconventional pathway for securing funding of a specific type – in a way that stands out from the services offered by the banks and other traditional finance providers.

If, however, I were an investor – individual or institutional – most (though not all) of the 9 companies explored within this article offer me no readily accessible portal through which to put my money to work. You might, as an institution, be capable of signing a bespoke agreement with, say, a trade finance company. But I suspect that such a contract would take a significant amount of time to work through – and cannot be compared like-for-like with the channeling of funds through a market-ready platform. If we are to view “Alternative Finance” as an emergent asset class, as indeed many people are, it then becomes very difficult to squeeze un-investible companies into our definition.

That aside, let’s imagine that “their” entry into the alternative finance space were to be granted. First and foremost, it may well necessitate the establishment of further terms of reference. “Trade Finance”, “Supply Chain Finance”, “Revenue-Based Finance”/”Merchant Cash Advance” and “Balance Sheet Lending” would need to enter the sector’s lexicon, alongside the familiar “Peer-to-Peer Lending”, “Crowdfunding” and “Invoice Finance” branches. And arguably these various niches should then be sectioned into further divisions – each of which would sit beneath the umbrella tag of “Alternative Finance”.

These kinds of debates might appear facetious to some – but the reality is that the industry (for want of a better term!) is as it stands a befuddling muddle of terms and tags. The aforementioned phrase “Marketplace Lending” is beginning to supplant “peer-to-peer lending” as the favoured method of referring to such platforms as Funding Circle and Lending Club. The P2P space is also yet to settle upon whether its users are “investing”, “lending” or “saving”. “Crowdfunding” is used by some to refer to all manner of alternative financing activity. The hybrid “crowdlending” is for others the go-to method for pointing to what we prefer to call the peer-to-peer lending sector.

Does it matter? Actually, yes. The ubiquitous challenge of raising the industry’s public profile is not simply a question of getting more people to say that they’ve heard of, say, peer-to-business lending – it’s crucially about making sure that people understand what peer-to-business lending is. The industry would be a great deal easier to decipher with standardized terms of reference in place – and thus there also needs to be a consensus on where such companies as TradeRiver and Fleximize fit within the jigsaw.   

This article has been very much focused upon the definitional limits of the alternative finance industry. But we’ll soon be tackling the more exciting question of practical limits and what the industry might achieve. Watch this space! 

Companies In This Article

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