Alternative Financing Market

Market Overview

The global market for alternative financing was valued at USD 6.57 billion in 2021, and it is anticipated to reach USD 10.61 billion by 2030 at a CAGR of 6.17%.

The term alternative finance refers to various financial channels, procedures, and instruments that have developed outside the conventional financial system, including regulated financial institutions and capital markets. Alternative financing activities that can be carried out through online markets include reward-based crowdfunding, equity-based crowdfunding, revenue-based financing, online lenders, peer-to-peer consumer and commercial loans, and invoice trading through third-party payment platforms.

Cryptocurrencies like Bitcoin are examples of alternative financial instruments, social impact bonds, SME mini-bonds, community shares, private placement, and other "shadow banking" processes. Alternative finance is distinct from conventional banking and the capital markets in that it uses 'disintermediation' made possible by technological advancements. This term refers to the practice of utilizing third-party capital by connecting fundraisers directly with funders. It, in turn, helps lower transactional costs and improve market efficiency.

Market Dynamics

Market Drivers

• Fundraising has become much easier thanks to alternative forms of finance

The availability of alternative financing options has made acquiring financial backing significantly less complex and time-consuming. Alternative finance providers are often well aligned to the requirements of smaller businesses and start-ups looking to expand. It is not only because alternative finance providers can provide less stringent measures than traditional lenders such as banks but also because they can be more flexible and responsive while providing superior customer service.

The most significant differentiator between traditional fundraising and alternative funding sources is the ease of access to funds. In addition, the growing acceptance of alternative financial instruments, the convenience of financing services, and the cost savings realized by consumers are the primary factors driving the industry. There was a positive effect on the market caused by the COVID-19 epidemic. The COVID-19 epidemic has devastated the world's small enterprises, which have been particularly heavily struck in several regions. Entrepreneurs and investors have sought alternative financing solutions to investors and funds to get through this crisis.

• The increase of technology-driven alternative lenders

In the recent past, the financial technology sector has made it possible for businesses to convert data into profits. Fintech companies have caused a stir in the traditional banking industry by concentrating their efforts on developing technological advancements that better identify risk. The collection of data could be improved because of developments in fintech. The underwriting procedure was streamlined with the use of this data. Additionally, developments in AI made it possible for underwriters to make choices more quickly. When taken collectively, these factors resulted in quicker loan disbursement and increased levels of client satisfaction.

Regarding approval rates, alternative lenders have a significant advantage over traditional banks. They can evaluate a greater number of the criteria contributing to determining an applicant's creditworthiness. At the same time, financial institutions look at the financial statements and the history of how loans have been repaid.

Market Opportunities

• The Indian market has the potential to grow in the coming years

India possesses a significant potential for the expansion of alternative financing. It has been somewhat realized in the preceding years that non-bank financing has a significant potential; nevertheless, due to the consistently high demand, this potential has not yet been fully tapped. The large pool of internet users in India (624 million people or 29.9 per cent of all users analyzed across all regions) and the high smartphone penetration in India (600.9 million people, or 42 per cent of the total population of India in 2021) will ensure the development of the market, both now and in the future.

Regional Analysis

According to region, the market is divided into North America, Europe, Asia-Pacific, Latin America, and the Middle East & Africa.

Asia-Pacific accounted for a substantial market revenue share greater than 80 per cent in 2021. Asian-Pacific countries are actively engaged in activities related to alternative funding. These activities include the collection of venture capital for new enterprises, the financing of creative businesses, and the direct linkage of investors to consumers and small business borrowers. Companies are modifying their approaches to conducting business and the kinds of goods and services they provide due to innovative thinking, which is a primary factor in the expansion of the alternative finance sector across the region. In China, alternative financing is a source of funding that has developed rapidly and evolved with extraordinary speed. This type of financing has also advanced with lightning-fast speed. As a result, there is a strong demand for alternative forms of finance, which increases the total amount of revenue generated in the Asia Pacific region.

It is anticipated that North America will have the highest CAGR during the forecast period. The concept of alternative finance has entered the mainstream in North America, attracting an increasing number of clients, start-ups, small enterprises, and institutional investors. Compared to other countries, the United States has the highest number of new businesses just getting their feet wet. The number of new businesses that have been launched in the United States and Canada is reported to be 70,339 and 3,194, correspondingly to Start-up Ranking. As a result, there will be a significant opening for alternate forms of financing in the North American market. As a result, during the projected period, it is anticipated that this region will see the highest CAGR.

Segmental Analysis

The global alternative financing market is divided into three parts based on type, end-user, and region. Further, the market is bifurcated into Crowdinvesting and Crowdfunding based on type. In 2021, the crowdinvesting segment dominated the market, which generated about 85% of total revenue. Since most entrepreneurs are funded by a combination of credit cards, personal savings, and a local network of friends and family, crowdinvesting has been developed as a valuable platform for small businesses and start-ups that may find it challenging to grow early investment. Additionally, angel and venture capital investors are increasingly using equity crowdfunding platforms. As a result, crowdinvesting platforms are widely used and have increased income in the alternative financing business.

Crowdfunding demand is predicted to grow at the fastest CAGR during the projection period and is expanding quickly. Crowdfunding has become increasingly popular over the past several years and is a viable option for start-ups and small enterprises to consider. Even though crowdfunding is frequently linked with raising money for start-ups, months of limitations and lockdowns have led to many small firms seeking crowdsourcing as a solution to resume regular operations.

Based on end-user

The market is divided into individuals and Enterprises.

According to region, the market is divided into North America, Europe, Asia-Pacific, Latin America, and the Middle East & Africa. Asia-Pacific dominates the market.

Recent Developments

• In December 2022, Kickstarter launched a new project to bridge the gap between two worlds. Blockchain technology will be used to develop a crowdfunding system similar to Kickstarter's, but with a twist.
• In April 2022, Wefunder announced the launch of communityround.com, a website that will promote venture-backed firms that have successfully raised Community Rounds and those that are preparing to do so.
• In May 2022, FINRA issued a fine of $1.4 Million to Wefunder and a fine of $350,000 to StartEngine Capital for compliance violations.