What is alternative finance?

Alternative finance is an umbrella term, not a single finance option. What the models share is that the money comes from outside a bank's standard lending book: a platform that matches borrowers with investors, a specialist lender, or a financier that advances money against your receivables. Standard bank term loans, and products offered under a full banking licence, do not usually count.

Each model moves money differently. Peer-to-peer platforms list a loan, fund it from a pool of retail, wholesale or institutional investors, and collect the repayments. Invoice discounting advances a percentage of your unpaid invoices, while a factor buys the invoices and collects them. A merchant cash advance is repaid as a fixed share of daily card takings. Revenue-based finance takes a percentage of future revenue until a set multiple is repaid, with no shares issued. Crowdfunding raises money from many backers in return for rewards, shares or loan repayments.

Typical users are start-ups and growth companies that need capital quickly or want to avoid giving up equity, SMEs with strong receivables or seasonal cash cycles, and businesses without bankable collateral or with a limited credit history. Investors also take part, by lending through marketplace platforms or buying shares in equity crowdfunding rounds.

The trade-off is usually cost. Alternative finance tends to win on speed and flexibility, and it can sidestep bank covenants and lengthy underwriting, but the price is often higher. Some receivables-based and asset-backed facilities look at cashflow and collateral rather than credit history, which is why they suit businesses a bank would decline, although those businesses should expect tighter security or a higher cost. Equity crowdfunding dilutes ownership outright, and a mezzanine lender may take warrants or conversion rights that dilute later. The debt models, including invoice finance, merchant cash advances and peer-to-peer loans, do not.

Ask every provider for an all-in cost example over your expected drawdown period, then compare offers over the same horizon. Fees to look for include origination or setup fees, ongoing service or platform fees, and the way default fees are calculated. A factor rate that looks small can translate into a very high annual cost when the term is short.

Alternative finance is regulated, but not the way consumer credit is. Credit provided wholly for business purposes is not regulated by the National Credit Code, so responsible lending obligations and the licensing rules that protect consumers generally do not apply to your borrowing. Some lending and broking activity still needs a credit licence, crowd-sourced funding platforms have their own disclosure rules, and ASIC monitors marketplace lenders. Your provider may still be an AFCA member, and anti-money laundering obligations apply, so expect identity checks. On tax, loan advances are generally not assessable income, while interest and fees may be deductible. Check with your accountant or the ATO.