The AltFi marketplace got another boost in 2016 when Title III of the Jumpstart Our Business Startups act removed barriers to investment. Called ‘crowdfunding,’ Title III enables nonaccredited investors to participate in capital-raising campaigns within certain limits. Previously, only accredited investors (e.g., financial institutions, business development companies, individuals with a net worth of more than $1 million) were privy to these campaigns.
How AltFi Works
Essentially, AltFi is a financial marketplace where online channels serve as intermediaries connecting borrowers with investors. Everything is done online, feeding into the on-demand expectations and consumer-centric focus that technology has brought to e-commerce.
Compared to the laborious process of bank lending, AltFi involves less paperwork, broader underwriting sources, faster credit decisions, and more transparency. And while credit scores are still important, they are no longer the overriding factor in many decisions.
Online platforms also have the advantage of being more flexible than traditional banks. The latter must weigh not just the creditworthiness of the borrower but whether its commitments to a specific market sector, say agriculture, have reached specified limits.
AltFi platforms are not held to such constraints and can encompass many different models, including rewards-based, equity, and peer-to-peer funding.
Rewards-based crowdfunding
Rewards-based crowdfunding platforms enable small businesses and startups to seek funding from contributors in exchange for a perk of some sort. No collateral or financial statements are required. Some sites approve requests before they can be posted; others do not. Regardless, the agreement is directly between the requester and the donor, not the crowdfunding site.
Companies post information on the platform’s website about their business, the amount and purpose of the funding requested, the perks for contributors, and an estimated delivery or completion date of the project.
Backers do not magically come knocking on one’s door. A successful campaign requires a good marketing strategy, usually using social media. Having family, friends, and customers lined up as donors before the project is posted enables the project to have a head start on funding. As momentum builds, others may be willing to contribute.
Businesses looking to finance operations or equipment through crowdfunding would be wise to shop around. Online platform fees can vary, up to about 9 percent of funds raised, in addition to a payment processing fee of 3 to 5 percent, and a third-party credit card fee.
