Alternative Financing means financing granted by parties other than the traditional lenders such as banks. Such a party doesn’t exclusively refer to the public or the ‘crowd’; investment funds, venture capital investors, credit unions, hedge funds and private equity firms can also act as lenders in this respect.
Important arguments for borrowers to choose for alternative financing as funding method are, in general, lower costs, efficiency and flexibility. For lenders, alternative forms of financing also offer an attractive option for achieving return on assets.
Alternative financing in practice
Various types of alternative financing are available. Some examples of these are:
- Peer-to-peer (P2P) loans
- Venture capital
- Bond issuance
Often, alternative financing is realised with the assistance of an intermediary – the (online) financing platform. Such a platform acts as the place where the financing demand and supply can meet. In addition, this platform can fulfil a role in the establishment, provision and/or servicing of alternative financing. Think here of the availability of standard loan and/or security documentation, collection and forwarding of interest payments and loan repayments, and/or assistance to lenders in the case of a borrower’s default.
Use of FinTech
Alternative financing is especially suited for the application of new financial technological developments, such as FinTech. Here we see a trend in the increasing use of online services and mobile apps for the establishment of alternative financing.
Distributed Ledger Technology
Another market development we see is the use of so-called Distributed Ledger Technology (DLT) – such as a blockchain – to structure and obtain alternative financing. In this process, tokenisation can be used as a means to facilitate alternative financing. Specifically, this concerns the offer of digital tokens based on blockchain, where these tokens represent an enforceable right (such as that with a share or an obligation loan) for the issuing party (for example, the borrower).
Security Token Offering
The issuance of such tokens is also termed Security Token Offering (STO). This type of token offers opportunities for financing entrepreneurial activities or specific assets, such as real estate, in an alternative manner. By using DLT, the issuing party can immediately obtain capital from investors. This results in greatly improved efficiency and also in reduced costs. In conclusion, obtaining financing via an STO can lead to better liquidity upon the possible future trading of the financing. This improved liquidity is because of the inherent marketability of tokens issued via a blockchain.
Various legal issues are involved with alternative financing. This is true for borrowers and lenders as well as for the financing platform. It is important to take account of these aspects as early as possible in the financing process. Doing so will prevent business models having to be revised retrospectively and/or that a party deals contrary to (legal financial) laws and regulations.
Legal issues on which to focus include:
- Aspects of financial supervision
- Involvement of consumers / non-consumers
- Role and authorities of a financing platform
- Terms and conditions of the financing
- Security possibly to be provided by the borrower
- Default by and insolvency of the borrower
Van Doorne has bundled its expertise with respect to alternative financing in a team of lawyers, tax lawyers and notaries from various disciplines who specialise in this area. The team develops innovative financing constructions, advises platforms which facilitate the establishment of alternative financing, and brings together new parties and markets.
We would be pleased to examine with you the way in which our alternative financing team can be of service to you. For more information about this, please contact Jelmer Baukema.