Alternative financing: everything you need to know

While financing is a common way for consumers to purchase goods and services, sometimes conventional forms of financing don't meet their needs and they need to look for alternatives. Consumers can look for alternatives to traditional credit for any number of reasons, including that they might not qualify for traditional credit, don't want to risk their credit, or do not want to tie themselves to a long-term contract. This is the reason alternative financing is in demand.

Here's a quick look at alternative finance

Financiers who use alternative finance are able to choose solutions for financial services that are not available within traditional financial systems such as banks or capital markets. As a result, alternative financing has become one of the most popular options for startups and small businesses both in the business-to-consumer and business-to-business markets.

How does alternative financing work?

When it comes to securing funding from traditional institutions, small businesses and startups often face challenges, as they have to deal with people who don't know much about their business, which costs them vital funding aid they could need to grow. Furthermore, traditional banks follow lengthy, drawn-out decision-making processes, which discourage startups and small businesses from joining them. 

Those companies who were previously underserved can benefit greatly from Alternative Finance, offering credit to companies without the hassle and bureaucracy of traditional finance institutions. As the demand for inclusive financial practices has increased, alternative financing options have also become more popular. This ensures that small businesses and startups have access to financial products and services that suit their specific requirements. 

Currently, Alternative Financing is growing and evolving, giving people and businesses a wide variety of financing options.

What are the different options for alternative finance?

There was a time when investing in small businesses and startups were considered risky, which is why alternative finance options were scarce in India. Below you will find examples of alternative finance options in India.

  • Factoring 

Businesses can use unpaid invoices as collateral to access fast credit, and they pay a certain percentage of the invoice amount to the lender. As a result, businesses are able to create smooth cash flows without face-to-face payment delays. 

  • Micro patronage.

In India, micro patronage is slowly growing in popularity, especially among businesses involved in medical expenses and social impact, and it uses marketplaces to facilitate direct connections between brands and consumers, thus raising funds for the operations of businesses.

  • Peer to Peer lending.

Like crowdfunding, peer-to-peer lending connects lenders with businesses and offers flexibility in terms of access to funds and choices for both parties. A P2P financing partner may be an individual investor, a company, or both, and can connect directly to share resources on their own terms. 

  • Personal Line of credit.

Financial institutions and alternative finance options both offer lines of credit. Traditional routes, however, place certain restrictions on credit, unlike alternative finance companies that have fewer restrictions on loan amounts and withdrawal limits. Funding criteria for these lines of credit are less stringent than those for major banks. 

  • Term loans.

In a nutshell, term loans are loans that are given for a fixed period of time for a specific amount. While they are similar to bank loans, they offer the advantage that their terms can be negotiated and that interest can be deductible, but their interest rate may be higher than that of traditional loans.

  • Finance based on revenue.

It is a credit model that gives startups funds and in return takes a percentage of their gross revenue. Using revenue-based financing, businesses are able to access capital upfront, reduce their cash management costs, and invest in growth initiatives. It works best for companies with strong gross margins, such as service companies and e-commerce businesses.

  • Merchant cash advances. 

It is a short-term financing solution that is designed for businesses that need cash quickly. Underwriters examine credit card receipts to assess repayment ability, repayment periods, interest rates, and other expenses.


By leveraging advances in artificial intelligence, machine learning, blockchain, and more, alternative finance companies will be able to offer clients faster, more flexible, and more secure services. Moreover, alternative financing platforms will present themselves as viable investment opportunities for individuals and are expected to grow in India in the coming years.

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