Digital Banking Trends and Alternative Finance
What is the purpose of Digital Banking?
Digital banking is part of the broader context for the move to online banking, where banking services are delivered over the internet. The shift from traditional to digital banking has been gradual and remains ongoing, and is constituted by differing degrees of banking service digitization
What is the competitive landscape and who are its main contenders?
- Private Banks and traditional finance systems.
- Fintech Startups
What are the main factors for change in the domain?
- Cryptocurrencies and decentralized ledgers.
- New innovations are automating the processes of collateral borrowing and lending money.
What are the technologies used?
Blockchains, peer to peer lending services, machine learning and deep learning and artificial intelligence.
What is its past, present, and future growth?
Traditionally you would need walk to a bank for approval when seeking financial assistance but now things are easier with online and mobile apps that automate the process of getting loans and being screened using FICO scores for loan approvals.
What is Alternative Finance?
Alternative finance refers to financial channels, processes, and instruments that have emerged outside of the traditional finance system such as regulated banks and capital markets
Alternative finance is any type of business finance that doesn’t come from a mainstream provider like a high street bank. Mainstream finance is great for many businesses — but the banks often have criteria which smaller businesses can’t fulfill, and they need other options.
In the past, alternative finance providers were hard to find, and might have had a specific product or sector they specialized in. These days, there’s a huge variety of lenders available and dozens of products, so you can find the finance that’s right for you — and it’s often much faster than through the bank.
Perhaps you need a fast business loan? Or maybe you’re looking to manage your cashflow using a new form of invoice finance? There is also a wide variety of alternative business funding that can help if your business has had difficulty in the past, for example if you’ve received a CCJ or an accelerated payment notice from HMRC.
Whatever you need alternative finance for, here’s your guide to some of the most common types of alternative business finance:
1. Term loans
The most common type of business loan, a term loan can be known by a variety of other names like unsecured loan, bridging loan, or cash flow loan. Broadly speaking, they all work in the same way: the lender and business agree on an amount, an interest rate, and a timeframe to pay it back (the ‘term’). There are different forms of term loan in alternative business funding, for example some require security or personal guarantees, while others are more based on credit rating or trading history.
2. Invoice finance
Invoice finance is a great way to unlock the cash in your invoices, especially if you have large outstanding invoices, big projects, or established clients.
The lender effectively buys your unpaid invoices, so you have most of the value straight away. Once your customer pays the invoice, you get the remaining balance minus the lender’s fee.
There are a few subcategories within invoice finance, like factoring and confidential invoice discounting. Different products are suitable for different businesses, but overall invoice finance is a useful way to manage cashflow if your business trades on credit and regularly invoices other companies.
3. Asset finance
Broadly speaking, there are two types of asset finance. One is funding secured against assets, known as asset refinance, which uses valuable items in your business as security for a loan.
The other type of asset finance includes products like equipment leasing and hire purchase, which are specifically designed for funding new and used assets like machinery and vehicles.
Equipment leasing and hire purchase can cover almost anything, whether you need plant machinery, catering equipment, telecoms systems, or a new van. There are many lenders within alternative business funding that specialize in a particular type of item.
4. Property finance
There’s also a wide range of property development finance alternatives, like commercial mortgages or auction finance. Property development is a complex field and there are many different alternative finance products available to help build your portfolio — so we’ve got eight practical property development tips, a guide on how to buy property at auction, and much more.
5. Crowdfunding and peer-to-peer lending
Online platforms connect businesses seeking finance with a number of individuals. Generally this involves either investors taking a small percentage of equity in the company (equity crowdfunding), or lenders loaning money and earning interest on repayments (peer-to-peer lending). The idea is to create a mutually beneficial arrangement for both sides — the business gets easier access to finance, and the lenders or investors can support small businesses and have a diverse portfolio without the middleman.
Crowdfunding and peer-to-peer lending aren’t right for every firm, but if you’ve got a good business plan that appeals to investors they can be a useful way of getting funding.
6. Merchant cash advances
If your customers pay you via card terminals, a merchant cash advance gets you a cash sum based on future card sales, generally up to a month’s revenue. It’s quick, straightforward, and a good fit for businesses with a high number of low-value transactions like cafés and shops — and the repayments are taken at source, making it simple and hands-off for busy company owners.
- Digital banking has made it easier to access financial services online and via mobile devices
- Traditional banks and fintech startups are competing in the digital banking space
- New technologies like blockchain, machine learning, and artificial intelligence are driving innovation in digital banking
- Alternative finance provides businesses with options for obtaining funding and managing cashflow, such as term loans, invoice finance, and asset finance
- It is important for businesses to stay informed about trends and developments in digital banking and alternative finance in order to make informed financial decisions
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