The Ultimate Alternative Finance Guide

A comprehensive look at alternative finance options for small business

In today's digital age, small businesses have more financing options available to them than ever before.

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What is alternative finance?

Alternative finance refers to forms of finance that are outside the institutional finance system of banks and capital markets. ‘Fintech’ is the ecosystem within alternative finance made up of companies, technology, and processes that aim to improve traditional methods of finance in categories such as:

  • Payments and invoicing
  • Consumer lending and credit
  • Small business lending and credit
  • International money transfers
  • Equity financing and crowdfunding
  • Insurance
  • Consumer banking
  • Wealth management
  • Savings and investments
  • Capital markets
  • Risk management
  • Regulation management
  • Cryptocurrency and blockchain

Table of Contents:

Understanding Alternative Finance

Alternative Finance Basics

What Is Alternative Finance?

What does fintech stand for?

Fintech stands for financial technology. Originally, the term referred to the back-end technology that was used in the traditional financial sector, but since the start of the 21st century, the term has expanded to include new technological innovations in the financial sector, such as cryptocurrencies and online lending platforms.

Simply put, fintech applies technology in order to improve financial activities.

Who are fintech companies?

Fintech companies are often startups or more established financial and technology companies that are trying to improve upon traditional forms of finance. North America has the greatest density of fintech companies in the world, closely followed by Asia (Investopedia).

What do fintech firms do?

Fintech companies are the providers of financial technology that enables transactions for consumers and businesses, or helps other companies manage the financial aspects of their operations. Fintech firms offer a wide array of products and solutions such as:

  • Crowdfunding platforms, to help raise funding for start-ups
  • Cryptocurrency and digital cash to facilitate online transactions
  • Blockchain technology, a digital ledger in which transactions using cryptocurrency are recorded
  • Smart contracts, to automatically execute contracts between buyers and sellers
  • Open banking, which provides third-parties with access to bank data to build applications, such as budgeting and money management tools
  • Insurtech, which uses technology to streamline the insurance industry
  • Invoice factoring, to cover cash flow gaps for small businesses
  • Peer-to-peer lending, to facilitate lending outside of the bank
  • Regtech, which helps financial service firms meet industry regulatory and compliance rules
  • Robo-advisors, which automate investment advice at an affordable price for consumers
  • Cybersecurity, to protect against unauthorized use of electronic data

 

When did fintech start?

Fintech is often thought of as a recent phenomenon, which brings to mind technological innovations such as Bitcoin or mobile wallets. However, technology has played a key role in the financial sector for a long time.

Fintech technically dates as far back as the 1950s, when credit cards were introduced to ease the burden of carrying cash. It has been evolving ever since, with the introduction of ATMs, an electronic stock exchange, mainframe computers at banks, and the rise of the Internet, allowing for e-commerce and financial services across multiple devices. Have you ever taken a photograph of a paper check to deposit it into your account? That’s a recent fintech innovation too!

How does fintech work?

A fintech company is a financial company using technology to innovate upon existing institutional financial products. Generally, fintech innovations work to improve upon specific areas of a financial product, up to and including the speed of transactions, security, accessibility, cost, and the overall user experience. These companies typically consist of two core teams, with the engineers on one side and the financial analysts on the other side.

How does fintech make money?

There are multiple business models that fintech companies use to earn revenue. The most common ones are listed below.

Brokerage Fees

Similar to a traditional broker, fintech companies receive a fee or commission for facilitating a transaction. Here are some examples:

  • Payment providers charge a 2-3% fee for each payment.
  • Money transfer platforms charge a fee for each currency conversion
  • Online stock brokers charge a fee for each trade
  • Online lenders receive a percentage of the transaction for connecting a borrower and lender
 
Service Fees

These are different from brokerage fees because they are not dependent upon transactions to generate revenue. For example:

  • Robo-advisors charge a management fee on assets that are actively being invested
  • Online lenders receive interest payments or fees from their borrowers
 
Lead Generation

Some insurance and lending marketplaces receive a commission for sending customers to partner businesses. The fee can be paid out based on traffic, leads, or conversion.

  • Lending aggregators earn a commission by sending would-be borrowers to the right lending solution
  • Affiliates earn an affiliate fee by driving traffic to partners through content and search results

 

Who uses fintech?

There are four main categories of users: 1) consumers; 2) business-to-consumer applications 3) business-to-business applications; and 4) the clients of financial services companies.

  • Consumers use fintech products to improve accessibility (making it easier to complete a transaction) and to find an optimized user experience. Some fintech products are positioned to be more affordable than other traditional products.
  • B2C fintech users are making use of products that enable faster or better quality customer service; including machine learning algorithms, credit underwriting automation, and onboarding services. Often these products simplify the back-office functions or improve their customers’ experiences.
  • B2B fintech applications let businesses transact more efficiently and affordably. Invoicing, payments, accounts receivable, and accounts payable functions (among many others) all have opportunities to improve through automation and efficiency efforts.
  • Finally, some new fintech innovations are often not the direct choice of the end user; some organizations adopt a new financial platform and obligate their users to create a profile and engage with the business on this new interface. Some payment platforms and security platforms require users to conduct business with their client through these products instead of through traditional means (over the counter, email, postage mail, etc.)

Fintech solutions also provide opportunities for groups that were previously underserved – these are consumers who have limited or no access to traditional banks and financial services.

Why is fintech popular?

Fintech is popular, both in headline news and also as measured by growth in the sector, because of two core shifts in the market. The “sudden” emergence of fintech (growth compared to other areas of startup innovation) can be attributed to developments in technology and a shift in user adoption of digital financial products.

Fintech is growing in popularity because access to technology has evolved to a place where smaller companies are able to offer competitive products. Financial products are no longer exclusively offered by traditional financial institutions. Consumers using mobile apps or the web now have instant access to their finances and don’t have to visit bank branches or wait on hold on the phone. Fintech has offered consumers and businesses the option to take charge of their own personal financial decisions at any time they choose.

Why is fintech important?

Fintech innovation matters because it is providing financial access to underserved markets that went unaddressed in the traditional financial ecosystem. For example, fintech has made access to capital easier in developing countries and creates new opportunities for “under-banked” consumers and businesses who previously had few options to access credit.

For small businesses, fintech has not only made access to capital faster, but possible. Historically, 69% of small businesses have fallen into the “under-banked” category of borrowers, meaning they did not receive the full amount of credit they needed to grow (SBCS).

For everyday consumers, fintech has made it easier to manage finances and have access to financial products and services at a much lower cost and with greater convenience.

Are fintech companies regulated?

While there are concerns that the fintech landscape is less regulated than the traditional financial services industry, fintech companies are still bound by many of the same obligations as their institutional counterparts.

For example, many fintech companies and federally-regulated financial institutions have partnered up to improve back-office functions, such as settlement, clearing, and loan approvals. There are also fintech companies that exist outside this regulatory framework, but they still have to comply with certain federal and provincial/state regulations that apply to the entire financial services sector.

As with any new industry, regulation in fintech will continue to evolve over the next few years in order to optimize user experience.

Who regulates fintech?

In Canada, the regulation of financial services as a whole falls under the shared jurisdiction of the federal and provincial governments. Regulators oversee aspects of financial services such as investor protection and securities law, consumer protection, anti-money laundering, privacy and data security, and payment processing.

In the U.S., the federal government oversees the financial services industry, with occasional involvement from state and local officials to help regulate markets and certain companies.

What is fintech ranking?

The International Data Corporation (IDC) releases an annual ranking of all fintech companies based on calendar year revenues.

The categories are divided into ‘FinTech Rankings: Top 100’ for vendors that derive more than one-third of their revenue from financial institutions, and ‘FinTech Rankings: Enterprise 25’ for companies that derive less than one-third of their revenues from financial institutions, and serve multiple industries.

What is fintech 100?

The Fintech 100 is a showcase of the world’s leading 50 ‘Established’ fintech companies, and 50 ‘Emerging Stars’ that is released by KPMG and H2 Ventures on an annual basis.  

Can fintech fix financial services?

Fintech was pioneered by people from the banking industry who were tired of the old way of doing things and business owners themselves, who are committed to providing a better, more transparent experience for users.

This is already having a ripple effect within traditional financial services. Many fintech companies and banks have started to form partnerships to help improve upon the current business model. As long as these partnerships continue to put customers’ needs first, the outlook is promising.

What is alternative funding?

Alternative funding refers to all the non-bank options that are available for small businesses, such as non-bank lending (including online lending), crowdfunding, grants, angel investors, venture capitalists, and factoring or invoice advances.

What are non bank financial institutions?

A non-bank financial institution (NBFI) is not considered a full-scale bank because it doesn’t engage in both lending and accepting deposits – they do either one or the other. For example, a retail store offering a credit card is a non-bank institution since it does not accept deposits.

Who are non bank lenders?

Non-bank lenders provide alternative loans. Some traditional forms of non-bank lending for small businesses include merchant cash advances, accounts receivable financing, and invoice factoring – these provide funding based on accounting data such as future sales and pending invoices.

Some traditional forms of non-bank lending for personal loans are retail credit cards and payday loans.

What is fintech lending?

Fintech lending, or online lending, refers to newer forms of non-bank lending that are made possible due to technological innovation. In particular, online lending has become a popular financing option for small businesses, as opposed to obtaining a loan from a bank.  

This is because banks require a strong credit history, something that a small business with little to no historical records is unable to provide. Due to this and an increasingly conservative financial climate, banks have scaled back on the number of loans that are offered to small businesses, which has led to a sizeable credit gap.

Approximately 60% of small businesses require loans that are under $100,000, which is exactly the market gap that online lenders seek to fill (Forbes).

What do lending companies do?

Put simply, lending companies provide loans to individuals or businesses. A lending company will provide a quick and simple way to access cash, often to help small businesses sustain their daily operations.

Lending companies typically have arrangements with investors to provide the ‘loaning money’ to their customers.

How does online lending work?

Similar to a loan at the bank, you need to apply for a loan with an online lender.

Unlike banks, which put a heavy emphasis on personal and business credit, online lenders have the ability to take other factors into consideration, such as cash flow, sales history, online reviews, and even social media interactions.

Why online lending?

The biggest benefit of online lending is that the entire process is much easier than with a traditional bank. Below are some of the biggest benefits:

  • Quicker approval: a traditional application form for a bank loan takes a long time to review, and you may need to visit the branch in-person. With online lending, you can instantly find out whether or not you’re approved, the amount you can borrow, and what your payment plan will look like.
  • Easier approval: in order to approve a loan, banks require a high credit score and multiple years of credit history. This makes it difficult for most startups or small businesses who do not have years of credit history. In contrast, online lenders offer much more flexibility and will turn to other methods to evaluate your trustworthiness, such as utility payments.
  • Lower fees: since online lenders don’t have the same overhead costs as a physical location, they are able to charge smaller service fees and at times, better interest rates.
  • No collateral required: in addition to credit history, banks typically require the loan to be secured against your assets. Fortunately, most online loans are unsecured, meaning that if you fail to repay the loan, your assets won’t get possessed, but your credit score does have the potential to drop.
  • Specialization: traditional banks offer multiple services and financial products, whereas online lenders typically offer just one service – lending. Specialization enables a better customer experience, ranging from more customized solutions to greater employee knowledge and expertise.

 

What is fintech banking?

The European Central Bank defines a fintech bank to be one which has “a business model in which the production and delivery of banking products and services are based on technology-enabled innovation”.

In layman’s terms, the central role of technology is what separates a fintech bank from a traditional one.

How will fintech affect banks?

Although fintech companies are putting pressure on traditional financial institutions, the reality is that fintech won’t kill banks. Fintech companies are growing fast, however they are still tiny in comparison to the banking industry. For example, the biggest fintech lender till date has arranged loans of up to $9 billion, however credit card debt in America alone is at $885 billion. Fintech companies are dealing in billions, whereas banks are dealing in trillions.

Plus, banks have some ingrained advantages such as access to customer chequing accounts, being able to create credit at a whim, and having nearly every household as their existing customer. While fintech companies won’t kill banks, they may reduce their profitability and force them to change to make their services more competitive.

Online Financing Options

Online Financing Overview

What sources of finance are available to businesses?

Some traditional sources of finance that are available are:

  • Banks e.g. business loan, line of credit, overdraft
  • Family and friends
  • Government grants and subsidies
  • Venture capital
  • Angel investors
  • Business incubators
  • Merchant cash advances
  • Invoice factoring companies
 

However, the problem with many traditional sources of finance such as banks and investors are that they involve a lot of time, red tape, paperwork, and they place a very large emphasis on past credit history, which most startups and small businesses don’t have.

Fortunately, due to the rise of digital solutions at fintech companies, some online sources of finance that overcome these hurdles are:

  • Crowdfunding
  • Peer to peer lending

It has also become easier to access certain traditional sources of finance online, namely:

Crowdfunding

What does crowdfunding mean?

Crowdfunding refers to raising money for a new project or venture from a large number of people, who each contribute a relatively small amount. This is typically done via the Internet or a crowdfunding site, also known as a crowdfunding platform.

How did crowdfunding start?

Modern day crowdfunding first began in 1997, when a British rock band raised money for its upcoming reunion tour from fans via online donations. This innovative idea gave birth to the first crowdfunding platform, called ArtistShare. Since then, the crowdfunding industry has been growing consistently each year, gaining significant traction in 2008.

How does crowdfunding work?

There are four different types of crowdfunding available; these differ based on what is received in exchange for a contribution:

  • Donation-based crowdfunding: the contributor provides a donation to a person or company, and may or not may not be promised something in return.
  • Rewards-based crowdfunding: the contributor is promised a reward in return, often related to the project or cause they are supporting.
  • Investment-based crowdfunding: the contributor (or in this case, investor) receives a stake in the company, typically a share. This is also known as equity crowdfunding.
  • Loan-based crowdfunding: the contributor loans money to a person or company at a set interest rate. This is also referred to as peer-to-peer lending and is discussed in more detail in the previous section.

 

How do crowdfunding sites work?

Crowdfunding takes place on a crowdfunding site, also known as a crowdfunding platform. Whether you are looking to raise or contribute funds, you will need to register with the website in order to participate.

Crowdfunding sites will typically list all projects or ventures that are being pitched on the website. Each project or venture should provide details such as:

  • How much it wants to raise
  • How much has been raised so far
  • How many people have already contributed
  • How the money will be used
  • How long the pitch is open for accepting contributions
  • What you will receive in return e.g. shares, reward

 

Crowdfunding money goes to the project owner or venture only if it raises the full amount of the contribution goal stated in the pitch.

Who uses crowdfunding?

Crowdfunding is used for a variety of reasons, from raising money for a sick family member to launching a small business. Below are some common users that benefit from crowdfunding:

  • Non-profits, charities, and social enterprises looking for funds for a project, program, or product with a social mission
  • Individuals or teams raising money for a challenge, fundraiser, or charity event
  • Individuals looking for funding to take care of a sick friend, family member, or pet
  • Creative professionals such as authors, artists and filmmakers looking for funding
  • Startups looking to launch an innovative new product or service
  • Small businesses that are looking to expand


Who should consider crowdfunding?

Crowdfunding is appropriate for all the users mentioned above.

It is also an option for small businesses that are unable to secure a bank loan or bring on an investor. Businesses encompassing the following factors generally have the most success with crowdfunding projects:

  • Visibilitylarge social media presence or an active community will help spread awareness and generate hype far more easily.
  • Simple to understandif the business is finite, visible and understandable, it has potential to do well e.g. a new toy for children. On the other hand, a new, complicated piece of technology used in back-end data processing is unlikely to gain traction.
  • Time and money: businesses should have the time and funds to build up hype and put together a strong crowdfunding campaign.

 

It is important to note that crowdfunding is most popular for personal financing, but it may not be the best solution for business financing, especially as an ongoing solution.

Why is crowdfunding good?

Whether you’re an individual or a small business, crowdfunding can be an effective way to raise funds. Here are five reasons why it works well:

  • Speed: A typical bank loan application or securing investment from an angel investor could take months – that too, for a small amount. With crowdfunding, if you have the right audience or market demand, it is possible to raise large amounts in a relatively short period of time.
  • Reduces risk: Oftentimes, business owners can sink funds into a business idea without understanding market demand. Crowdfunding allows business owners to test proof of concept and marketability.
  • Fan base: Crowdfunding allows you to build a loyal fan base and potential customer base for the future.
  • Attracts investors: If you are able to prove market demand through a crowdfunding campaign, it will be easier to attract investors such as venture capitalists and angel investors later on.
  • Global audience: Traditional financing options limit you to the region you are in. With crowdfunding you can tap into funds and potential customers from all over the world.

 

Why is crowdfunding bad?

There are five main reasons why crowdfunding may not be a good idea for some small businesses and startups:

  • Less due diligence: Banks and venture capitalists ask the tough business questions that make you put in the work to come up with a rock-solid business plan. With crowdfunding, the average contributor will not ask the tough questions, which can prevent you from identifying (and fixing) the weak areas in your business model early on.
  • CopycatsA public display of your idea makes it more prone to being copied or stolen by other companies that have more capital.
  • Failed projectsA failure can harm a company’s reputation and will let down the hundreds (if not thousands) of people who backed them.
  • Presence: A strong network or community is necessary for visibility. Strong social media presence is very important.
  • Targets not achieved: If the contribution goal isn’t met, businesses go away empty-handed and contributors get their funds back.

 

Why is crowdfunding important?

Similar to fintech as a whole, crowdfunding is important because it helps out underserved markets that are unaddressed in the traditional financial ecosystem. Crowdfunding has made access to capital easier, faster – and in some cases, even possible at all.

For small businesses, crowdfunding helps bypass the red tape that blocks access to capital. According to a Global Entrepreneurship Monitor study, 95% of business plans received by venture capitalists and accredited investors have been rejected. Oftentimes, this is because a startup does not have enough years in business, a strong credit history, or proof of market demand.

Crowdfunding is also important because it helps individuals and organizations with a social cause. For example, a family member who otherwise would not be able to afford medical care for their loved one, or a local charity that can now expand its fundraising efforts to a global scale and raise more funds.

Can anyone use crowdfunding?

Yes, absolutely anyone can use crowdfunding. All you have to do is set up an account on a crowdfunding website, build a campaign, and post it. Some platforms will have certain requirements or an application process, which also need to be considered.

Can I use crowdfunding to start a business?

While crowdfunding can technically be used to start a business, it may not be the best option for first-time small business owners. This is because raising funds can take a long time, and the success largely hinges on having a large social media presence or existing community.

Can nonprofits use crowdfunding?

Yes, any nonprofit can take advantage of the benefits of crowdfunding. Just like any other fundraising activity, it is important that nonprofits review the laws that regulate fundraising in their region. For example, many states in the U.S. require nonprofits to register with the state before raising funds.

Can charities use crowdfunding?

Yes, crowdfunding is an excellent way to raise funds for charities. Crowdfunding must be treated like any other fundraising activity and charitable registration is required.

Are crowdfunding sites safe?

There are many measures put in place by regulatory bodies and crowdfunding portals to ensure that the experience is safe. Below are some of the safety measures that are taken to protect users:

  • Secure Sockets Layer (SSL) connections are used to ensure that the transmission of personal data is encrypted and private. When you see a little lock in the web address bar or see ‘https://’, it means that the crowdfunding platform is an SSL-secured website.
  • Trust and Safety Departments often exist in large crowdfunding companies, who work with local law enforcement, handle financial disagreements, and can track illegal activities such as money laundering.
  • Guarantees are offered by many crowdfunding platforms to all campaign organizers, beneficiaries, and donors to make sure they are safe.

 

If you are investing in a crowdfunding venture or project, keep in mind that some level of risk will exist, as with most other investments. A good rule of thumb is to start small and diversify your investments across multiple sites.

Is crowdfunding regulated?

From the four different types of crowdfunding listed above, two of these are regulated and two are unregulated. Donation-based and reward-based crowdfunding are not regulated, since the amounts are typically small and contributors are not receiving money in exchange.

Investment-based (equity crowdfunding) and loan-based (peer to peer lending) however, are regulated since they involve much larger amounts, and contributors receive money in exchange as well.

Who regulates crowdfunding?

Canada regulates securities at a provincial level; each province and territory has its own securities commission and legislation e.g. the Ontario Securities Commission.

Within the U.S., crowdfunding is subject to oversight by the Federal Trade Commission (FTC). In order to operate, a crowdfunding platform has to register at a federal level with the Securities and Exchange Commission (SEC) and become a member of the Financial Industry Regulatory Authority (FINRA).

In addition to federal and provincial regulations, crowdfunding portals have their own standards that often exceed those required by regulators. Funding portals go the extra mile because they realize that in order to be successful, they have to offer the best protection for their users.

Where is crowdfunding legal?

This question most often refers to equity crowdfunding, which is surrounded by a lot of misinformation and confusion.

In Canada, equity crowdfunding is legal under the Accredited Investor and Offering Memorandum exemptions. These are two exemptions that securities regulators provide to allow Canadians to raise funds from crowdfunding.

In the United States, equity crowdfunding is legal under Title III of the Jumpstart Our Business Startups Act (JOBS) as of May 16, 2016.

Which states allow crowdfunding?

As of August 2017, all states permit some type of intrastate equity crowdfunding aside from a few exceptions.

The following states are in various stages of enacting or considering intrastate equity crowdfunding:

  • California
  • Hawaii
  • Missouri
  • Nevada
  • New Hampshire
  • New York
  • Oklahoma
  • Ohio

 

The following state has rejected intrastate equity crowdfunding:

  • Utah

 

The following states/territories have neither enacted nor rejected intrastate equity crowdfunding exemptions:

  • North Dakota
  • South Dakota
  • Pennsylvania
  • Connecticut
  • Rhode Island
  • Louisiana
  • Puerto Rico

 

Who invests in crowdfunding?

There are two main classes of investors for equity crowdfunding: ordinary citizens and accredited investors. Canada and the United States allow both classes to participate in equity crowdfunding within certain parameters. Some other countries only allow accredited investors to participate, or are bringing rules into motion that will allow ordinary citizens to invest.

Accredited or eligible investors are essentially high net worth individuals that meet certain income or asset holdings and are deemed to be more sophisticated investors by regulatory bodies.

Will crowdfunding last?

In 2012 there were less than 500 crowdfunding platforms. Just two years later in 2014, there were over 1000 platforms and this number is continuing to rise.

What’s more, there are certain innovations taking place in the fintech space that will continue to encourage this growth:

  • Cryptocurrency is accepted by crowdfunding platforms. Since cryptocurrency is easy to purchase, transfer and make payments with, it will make participation in crowdfunding much easier.
  • Specialized platforms are on the rise, allowing people to contribute and invest in niche projects they are interested in.
  • Subscription crowdfunding is gaining popularity in the creative space; this allows people to contribute funds on an ongoing basis to artists, authors, YouTubers and more.
  • Investor appeal is greater for businesses that start with crowdfunding, as it shows proof of marketability and mitigates risk.


Are crowdfunding contributions taxable?

Crowdfunding contributions are tax deductible under a donations-based model if the recipient of funds is a qualified charity. If you are donating to a business or other project, your contributions are considered personal gifts instead of tax-exempt donations.

Are crowdfunding funds taxable?

The tax implications on crowdfunding funds will differ based on the crowdfunding model that is being used, as this will determine how the funds are labeled i.e. business income, gift, loan or capital contribution.

While there is no definitive guide on the matter – both the CRA and IRS do not have an official stance as yet on all aspects of crowdfunding – below are some basic guidelines.

  • Donation-based: funds from a donation-based crowdfunding campaign generally do not need to be reported, as they are considered a gift.
  • Rewards-based: funds received from rewards-based crowdfunding are typically considered as business income. Therefore, the fundraiser can claim deductions for any expenses that were incurred to earn that business income.
  • Debt-based: the general assumption is that the interest an investor collects would be classified as investment income and taxed accordingly. For the borrower, the interest payments would be deductible if the loan was used to earn business income.
  • Equity-based: capital contributions are generally considered to be non-deductible.

Peer to Peer (P2P) Lending

What is peer to peer lending?

Peer to peer lending means that borrowers can take loans from individual investors who are willing to lend their own money at an agreed interest rate. A peer to peer lending service essentially cuts out the middleman, such as a traditional financial institution.

Is peer to peer lending the same as crowdfunding?

Technically, peer to peer lending is a form of debt-based crowdfunding since a borrower can raise funds directly from multiple investors.

What is a peer to peer lending platform?

A peer to peer lending platform is a for-profit organization that connects borrowers with lenders, in order to facilitate peer to peer loans.

How does peer to peer lending work?

Peer to peer lending platforms request borrowers to fill out an application, who then assess credit risk, determine a credit rating, and apply an interest rate to their profile. Individual investors view the profile of a borrower and assess whether they want to risk lending money to them.

Borrowers can then receive the total loan amount from an individual investor, or multiple investors. In the case of the latter, monthly repayment has to be made to each of the individual investors. Borrowers tend to receive a lower interest rate than they would have gotten at the bank. All monthly repayments are made through the peer to peer platform.

Lenders generate income from the interest on the loan amount they provide to the borrower. The interest amount often exceeds what they would have received using a traditional vehicle such as a savings account at a bank.

How do I use peer to peer lending?

If you are a lender, there will be a minimum amount you need to invest based on the lending platform you are using. The minimum amount is $25 for popular lending platforms in the United States. Companies will typically charge a percentage annual fee to investors.

In the United States, you need to make sure you live in an approved state and have a minimum gross annual income of $70,000.

As a borrower, you will need to fill out an online loan application found on the peer to peer lending platform.

When did peer to peer lending start?

Peer to peer lending took off in the mid-2000s when borrowers were getting frustrated with the banking sector’s dominance over the loan process. In 2015, Zopa was the first company in the world to offer peer to peer lending. The next most significant peer to peer lending company that launched was Funding Circle in 2010.

How big is peer to peer lending?

Peer to peer lending is one of the fastest growing segments in the financial services industry, with hundreds of sites across the world. As of 2017, the volume of global payments and remittances was over $1 trillion yearly, with per annum growth rates in peer to peer lending volumes reaching 50%.

As one of the fastest growing markets, the United States is predicted to hit 45% of the global market share in 2020 and generated $6.6 billion in loans in 2015.

Is peer to peer lending safe?

Peer to peer lending can be safe or unsafe, depending on your lending strategy. If you lend to high risk borrowers, there is a higher risk of default. However, if you lend to lower risk borrowers with a strong credit rating, peer to peer lending will be safer.

Peer to peer lending is also more secure when you take a conservative approach and diversify your investments, instead of lending all your money to one borrower.

Is peer to peer lending regulated?

Peer to peer lending in Canada is regulated, however it is a process that is still evolving. Canadian securities regulators have taken the position that peer to peer loans could be ‘securities’, and therefore peer to peer lending platforms need to register as securities dealers at a provincial level. In some cases, Canadian peer to peer lending platforms need to file a prospectus if they are issuing securities.

To sidestep this requirement, many peer to peer lending companies are using existing exemptions such as restricting investment to accredited investors.

Within the United States, the lending side is regulated by the Securities and Exchange Commission. The borrowing side of the business is regulated by other agencies such as the Consumer Financial Protection Bureau and the Federal Trade Commission.

Is peer to peer lending legal?

Yes, peer to peer lending is legal in both Canada and the United States. However, the regulations involved for companies to be legal are still quite complex and evolving.

What states allow peer to peer lending?

Every state in the United States has their own set of lending rules and regulations and laws about investments in securities. Some states can borrow and not invest, some can invest but not borrow. And some can do both.

Lastly, it also depends on which peer to peer lending platform is being used, as some states are open to one, but not the other.

Depending on the platform, borrowers may face restrictions in:

  • Iowa
  • Virginia
  • Maine
  • North Dakota

 

Peer to peer investing is legal in all states aside from Ohio.

Is peer to peer lending taxable?

Interest earned from peer to peer lending is taxed, similar to other investment income. As an individual, interest income will be taxed at a marginal rate. Losses on loan defaults are also able to be deducted.

Small Business Line of Credit

What is a business line of credit and how does it work?

A business line of credit is an arrangement between a borrower and lender – typically a bank, but fintech companies are now an option – that allows for a maximum loan balance that the borrower can maintain and is subject to an interest rate. A borrower can draw funds from the line of credit at any time, as long as the maximum loan amount is not exceeded.

How do payments work on a line of credit?

You can pay back any amount, so long as you make the minimum monthly payments that are set by the lender. These monthly payments can be a combination of interest and principal, or only interest.

Can you apply for a line of credit online?

Yes, you can apply for a business line of credit online through a lending institution’s website, by submitting an online application.  

Merchant Cash Advance

What is a merchant cash advance loan?

This is a lump-sum payment that is provided to a small business by a merchant account provider in exchange for a percentage of future credit card sales i.e. repayment is directly tied to future sales.

Merchant cash advance payments are automated and typically withheld by the credit card processor until the initial amount plus interest is paid back in full.

Are merchant cash advances legal?

Yes, merchant cash advances are legal. Merchant cash advances are technically not loans, since they are a portion of future credit or debit card sales. Therefore, they are not bound by usury laws and can charge higher interest rates.

Are merchant cash advances tax deductible?

Although payments made towards the principal are not tax deductible, you can deduct the cost of interest on the loans. Overall, merchant cash advance loans will not protect your income from taxes and will also not subject you to additional taxes, so they are by and large tax neutral.  

Is cash advance online safe?

Cash advance online – also known as a payday loan – is a convenient way to get quick access to funds, but it can come with very high interest rates. Although the industry is regulated, borrowers need to take extra care in seeking out reputable lenders.

A much safer option is invoice factoring; this also provides quick access to a lump-sum amount, but at a much lower fee. For example, FundThrough is able to provide 100% of the invoice value upfront to customers with rates as low as 0.5%.

Invoice Factoring

What is invoice factoring?

Invoice factoring is the process by which a business sells its invoices to a third party (called a factor) at a discount. This helps businesses with slow-paying customers meet their immediate cash flow needs and cover business expenses.

Invoice factoring is also known as accounts receivable factoring and accounts receivable financing.

How does invoice factoring work?

An invoice factoring company will typically purchase an invoice in two installments. The first installment will cover approximately 80% of the receivable, and the second installment will cover the remaining 20%, less the factoring fee, once the client pays the invoice in full.

If you are a small business, these are the steps you would follow:

  1. Submit invoices for purchasing
  2. The factoring company will send you the first installment (e.g. 80% of the invoice)
  3. Your client will pays the invoice 30-60 days later
  4. The factoring company will send you the second installment (e.g. 20% less the factoring fee)

 

Fortunately, companies like FundThrough have innovated this model and made it possible to receive 100% of the total invoice value upfront.

What is a factoring rate?

A factoring company will charge a factoring rate – or factoring fee – for their service, which is a percentage of the total amount of invoices being factored.

What is a typical factoring fee?

The factoring fee varies per business, and will depend on:

 

  • The industry you are in i.e. low-risk industries such as consulting, transportation, and staffing will have a lower factoring fee
  • The total quantity of invoices being factored i.e. a higher volume of invoices will lower the factoring fee
  • The stability of your business i.e. companies with a long and stable history will have a lower factoring fee
  • The days outstanding on submitted invoices i.e. the faster your customers pay your invoices, the lower the factoring fee
  • Whether the terms of agreement are recourse factoring, or non-recourse factoring. In the former agreement, the business agrees to buy back the invoices if they go unpaid. In the latter, the business has no obligation to absorb any unpaid invoices. As expected, the latter will have a higher factoring fee since it passes on a higher level of risk to the factoring company.

 

A typical factoring fee for 30 days will generally range from 1.5% to 4.5% per 30 days.

How much does invoice factoring cost?

There is a difference between the total factoring cost and the factoring rate. To calculate your total factoring cost, you have to consider the two components: the factoring advance, and the factoring rate.

The advance is the percentage of the invoice that you get up front and is equivalent to the sum total of your first installment e.g. 80% of the total invoice. The factoring rate is the cost of financing, based on the value of the invoice.

For example, an 80% advance at a rate of 3.5% will have a total cost per dollar of 4.4 cents (0.035/0.80*100).

Why use invoice factoring?

Invoice factoring is an excellent choice for small business owners that are looking for fast, ongoing access to cash at a lower rate than most other options.

These are the biggest benefits of using invoice factoring:

  • Quick access to cash. You can get access to cash within 24-48 hours on approved invoices. This is much faster than banks that can take weeks, if not months.
  • No debt. Unlike a loan, invoice factoring doesn’t add a liability to your balance sheet.
  • Reasonable fees. Over the years, factoring rates have come down as low as 1.5% and advances have gone up, as high as 95% as well.
  • Peace of mind. You will have stable cash flow to pay all business expenses, including payroll every month.
  • Easier access. Unlike a bank loan, you do not need long years in business and a strong financial history. Instead, the factoring company focuses on the strength of your customers’ ability to pay the invoices.
  • Less paperwork. A factoring company will deal with the headache of paperwork, processing and collecting payments!

 

What is the difference between invoice discounting and invoice factoring?

The difference between invoice discounting and factoring lies in who takes responsibility for collecting payment from debtors. With invoice factoring, the factoring company takes responsibility for collecting payments, whereas with invoice discounting, the business still retains control of collecting payments.

Invoice discounting also allows for more confidentiality; customers do not need to know a third-party factoring company is involved in assisting the business with its cash flow. With invoice factoring however, customers are making payments directly to the factoring company.

However, this is not the case with all invoice factoring companies. For example, FundThrough makes it possible for the payee to remain confidential.

Is invoice factoring regulated?

Invoice factoring companies are not regulated by a formal government body, which allows them to serve small business owners that are unable to secure a bank loan.

Most invoice factoring companies are self-regulated and are members of associations such as The International Factoring Association and the Commercial Finance Association in order to ensure they are following best practices.

Alternative Finance Best Practices

Alternative Finance Safety and Security

Is online lending safe?

Online lending is safe if you work with a reputable and reliable lending company or platform. As with any other life or business decision, finding a safe online lender requires some due diligence.

How do I find safe online lenders?

Before applying for a loan, use the Internet to do some quick research about the potential lending company or platform. You’ll want to look for the following:

  • A physical addressVisit the ‘contact us’ page of the website and search for the physical address. Then, verify this with a Google search.
  • Customer reviews: Do a Google search for “[insert company] customer reviews”. A legitimate lender will provide the name of the borrower and the small business if applicable, so that the review can be verified. For example, the FundThrough customer reviews page lists the name of each business owner and their company.
  • Third-party verification: Reliable companies will go out of their way to receive third-party certification. For example, FundThrough has an accredited business profile through the Better Business Bureau.
  • Visit social media: Most safe and reliable lenders will have an active presence on social media platforms such as Facebook, Twitter and Instagram. If you see photos of real people working at the office, that’s a pretty good sign!

Getting Started With Alternative Finance

Applying For Alternative Finance

How do I apply for funding online?

You will need to create an account with the lending platform or company, and fill out an online application. Fortunately, applying for funds online has become very quick and simple.

For example, with FundThrough you can create your account online in two minutes and receive invoice factoring approval within 24 hours.

Got Questions?

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