Alternative Financing

What is alternative financing?

Alternative financing is made up of all sources of financing that are independent of traditional bank financing, such as private financing. This type of financing connects investors with companies or individuals who need short-term financing. In other words, this type of financing is not offered by a bank, but by private financial entities, which operate similarly to banks and are regulated by the Bank of Spain.

The situation of alternative financing in Spain

Before 2008, 70% of business financing was bank-based, while for individuals, it could exceed 90%. In the context of the economic crisis at the end of the first decade of the 2000s, banks stopped lending, exacerbating the financial problems of companies and households.

From this point on, it became clear how important it was to find an alternative source of financing to the bank. Many countries learned from this mistake and have been shaping a more diversified financing structure to make businesses more resilient to disturbances affecting the banking system.

A clear example of this transition towards alternative financing is led by the United States, where bank financing currently represents less than 25%. Unfortunately, in Spain, we are still far from reaching these figures. In our country, bank financing still represents 80% of total financing, a trend considered negative by the European Central Bank because it is proven that diversified financing and independence help economies.

For this reason, in recent years, alternative financing has grown by around 114% in the European Union. The countries that have invested the most in this change are the United Kingdom, France, Germany, Sweden, and the Netherlands. The economies of these countries show signs of good health, as alternative financing offers new alternatives and complements traditional channels.

Benefits and drawbacks of alternative financing

As mentioned in the previous section, alternative financing is becoming increasingly present in our society due to its multiple benefits, especially when a bank denies access to credit. Its main advantages are:

• Speed: It requires less bureaucracy than when signing an operation through a bank. Additionally, a more personalized approach is provided, leading to faster credit access tailored to all needs.
• Flexibility: It is possible to obtain a credit repayment plan completely adapted to the customer’s needs, with grace periods if necessary.
• Diversification: This type of financing allows access to different sources and a wider range of possibilities. This way, it reduces dependence on traditional banking institutions.
• Regulatory oversight: It is becoming increasingly regulated, although there are still companies that try to offer services without following all the necessary steps. It is very important to request the relevant documentation before resorting to private financing to ensure compliance with the law. All alternative financing entities must be approved and supervised by the Bank of Spain.
• Reduction of banking dependence: As mentioned earlier, for a business and global economy, it is beneficial to diversify financing and reduce excessive dependence on bank credit.

On the other hand, it should be noted that alternative financing generally requires real estate collateral to reduce the risk of the operation. Therefore, if the amount is not repaid, it is important to consider the risk of losing the property.

TQ Eurocredit, the financial solution

We are aware that more and more companies are finding themselves without any financial assistance or security because traditional institutions have a large number of requirements and obstacles to granting financing.

Types of financing

There are many types of alternative financing to banks, and they are becoming more common. Below, we mention the most common ones:

• Non-bank financing: It works similarly to bank financing, but the money comes from an investor. Another of its features is that, to reduce the risk, a property backs the operation.
• Microcredits: Also from non-bank entities, they can carry high-interest rates, so caution is needed.
• Trade credit: Deferred payments granted by companies to their clients, usually due in 30 or 60 days.
• Factoring: Assignment of receivables in exchange for an interest. If done through a financing platform, it’s called Crowdfactoring.
• Family, friends, and grants: Take advantage of opportunities from the state and your closer environment.

Collaborative Financing

• Crowdlending: Loans between individuals and companies. These are online platforms that connect people or companies in need of money with investors who can lend it.
• Equity Crowdfunding: A number of individuals or companies finance a project in exchange for equity shares.
• Crowdfunding: A mass financing system with no compensation intent, usually to support a project.

Financing for Startups

• Business Angel: Financial contribution to make a profit with the company’s success. Trust in the project, and in addition to capital, provides experience and connections.
• Venture Capital: Investment in startups with potential in exchange for equity.

Business financing, is it a good option?

More and more companies are opting for alternative financing, which has made it the predominant type of financing, both in terms of quantity and transaction volume. Companies turn to this type of financing because it is the only one that can unlock any financial situation, especially when the bank denies it, whether due to risk or default. In many cases, alternative financing is the only rescue option for many businesses.

At TQ Eurocredit, as experts in business financing, we offer flexible solutions that are fully adapted to the needs of any company. We are market leaders, being the ideal alternative to traditional banking when the bank does not provide credit. Furthermore, unlike other entities, we have no limits, so we can respond to any type of need.