Bank lending versus alternative financing
Twenty years ago there were few alternatives or they did not amount to much. If it was a special loan request, the bank had its own specialized subsidiaries for this purpose. Think of real estate financing and leasing. We are now two economic crises later and banks are reluctant to provide loans. This is not only due to the losses they have suffered on their loan portfolios, but also due to the sharp increase in legislation and regulations.
This development and the increased degree of automation in the business community have given rise to many alternative financiers. Although the vast majority of business financing in the Netherlands still comes from banks, lending by alternative financiers is growing strongly. The word alternative is no longer justified as this market has now become quite mature. We will continue to use the term here to distinguish it from bank lending. We see alternative financing as any business financing without the intervention of a bank. We list the most well-known forms:
- Crowdfunding
This is a form of financing via an online platform that brings supply and demand together. The entrepreneur pitches his company with a short profile and explains what the requested financing is needed for. The entrepreneur also indicates in the profile what collateral is available and what the interest rate is. Private and business investors can register for the application and when it is 'full', the platform makes the requested credit available. The platform's revenue model is a cost and management fee. You can start a crowdfunding campaign for amounts from € 25.000 to several million. We see a development that entrepreneurs are increasingly using this product for real estate financing. - Direct lending
Wealthy parties provide financing directly to companies. They usually work together and make the loans available through a fund. A major advantage is the speed of the process, the flexible conditions and the fact that these parties require little or no security. This makes this form especially suitable for larger companies that have been around for some time. The interest costs are usually higher than those of bank financing. - Fintech financing
This is a collection of startups that provide loans via an online platform using an automated process. They use smart technologies such as algorithms to identify risks. Because the entire application and provision process takes place online, the processing time is very short, often only a few days, and the costs are limited. Here too, securities play a minor role because they mainly assess the company's cash flow. Fintech financing is suitable for smaller and larger companies as long as they have existed for at least 3 years. - American Factoring or selling invoices
Factoring has been around for a long time, but in recent years more and more parties have emerged who not only finance the entire accounts receivable portfolio of a company, but are also prepared to finance only one or a few invoices or accounts receivable. You could also classify this form under the heading 'Fintech', because the entire process is also highly automated. After purchasing the claim, the financier transfers the money within a few days. The reason why we name this group of financiers separately is the fact that they do not so much look at the financial position of the invoicing company, but rather at that of the customer. It is therefore not the company's cash flow that is important, but the certainty: the sold claim.
There are also alternative financiers who are involved in leasing business assets or even real estate through an online platform. While the Dutch financing market was very clear 20 years ago, it is now an interesting mix of many dozens of providers, each with their own advantages and disadvantages.
Want to know more?
Are you curious about which form of financing is most suitable for your company? Xolv Finance can assist you in identifying the parties that offer the optimal solution for your situation. Contact one of our specialists and we will be happy to help you!
