Alternative finance has revolutionized the way businesses secure capital by offering diverse and flexible funding options that go beyond traditional bank loans.
This evolving financial sector includes mechanisms such as crowdfunding, peer-to-peer lending, invoice financing, and microloans, providing crucial support to startups, small businesses, and even established enterprises facing funding challenges.
As access to conventional financing becomes increasingly strict, especially for startups, alternative finance plays a pivotal role in bridging the gap and empowering Filipino businesses with the necessary resources to innovate, expand, and compete.
Additionally, these innovative financial solutions provide businesses with greater flexibility, accessibility, and speed in securing the necessary capital to grow and thrive.
In this article, we will dive into the concept of what is alternative finance and highlight its significance and impact on modern business funding in the Philippines. Moreover, we will also explore some of its advantages and the challenges that businesses might face when applying for it.
What is Alternative Finance in The Philippines?
The Philippines is a thriving entrepreneurial landscape for budding entrepreneurs, but traditional bank loans can be challenging for some businesses to secure, especially startups. This is where Alternative Finance steps in.
So, what is alternative finance? Alternative Finance involves a diverse range of financing methods that connect businesses with investors or lenders outside the traditional banking system.
This type of financing involves platforms that allow individuals to lend directly to businesses called peer-to-peer lending, providing access to various online platforms where you raise capital from a large pool of people, also called crowdfunding, or even angel investors – wealthy individuals who invest in promising startups in exchange for equity or ownership stake in the business.
These alternative financing options can be particularly attractive for Philippine SMEs, both small and medium enterprises, due to their potentially faster approval times, more flexible terms, and focus on innovative business ideas.
Additionally, they can also be a great option for businesses that might not have a long credit history or the traditional collateral required by banks.
Also Read: Types of Business Loans in the Philippines
What is The Importance of Alternative Finance For Philippine SMEs?
Alternative finance has become an essential lifeline for SMEs in the Philippines, offering flexible and accessible funding solutions that traditional banking avenues often fail to provide.
As SMEs are the backbone of the Philippine economy, driving innovation, employment, and economic growth, access to diverse funding sources is critical for their sustainability and expansion.
Hence, alternative finance mechanisms such as crowdfunding, peer-to-peer lending, and microfinance enable these enterprises by providing them with quicker, more adaptable financial options tailored to meet their unique preferences and needs.
Come, let us look a little deeper and understand the importance of alternative finance for Philippine SMEs and its significant impact on their growth and success -
1. Increased Access to Capital
Alternative finance provides SMEs with greater access to capital, especially for those who may not qualify for traditional bank loans due to strict credit requirements.
2. Flexible Funding Options
SMEs can benefit from a variety of funding options designed to satisfy their specific needs, including crowdfunding, peer-to-peer lending, invoice financing, and microloans, offering more flexibility than traditional financing methods.
3. Faster Approval and Disbursement
Alternative finance solutions often feature quicker approval processes and faster fund disbursement, thereby enabling SMEs to address urgent financial needs and take advantage of immediate business opportunities that may present themselves.
4. Lower Barriers to Entry
Many alternative finance platforms have lower entry barriers, such as reduced documentation and credit score requirements, making it relatively easier for small businesses to secure the necessary funding.
5. Enhanced Financial Inclusion
By providing funding to underserved and marginalized sectors, alternative finance promotes financial inclusion, allowing more SMEs to participate in the overall economic development of the country.
6. Support for Innovation and Startups
Alternative finance is particularly beneficial for innovative startups and tech-driven businesses that may face challenges in obtaining traditional financing due to their unconventional business models and higher risk profiles.
7. Customized Financial Products
Alternative finance offers customized financial products that cater to the unique needs of SMEs, such as short-term loans for working capital or invoice financing to manage cash flow.
8. Community and Investor Engagement
Crowdfunding platforms allow SMEs to engage directly with their community and potential investors, developing a sense of ownership and support for the business among a wider audience.
9. Reduced Dependence on Traditional Banks
By diversifying their funding sources, SMEs can reduce their dependence on traditional banks, allowing them to have more resilient financial management and the ability to withstand economic fluctuations.
10. Promotion of Entrepreneurial Growth
Access to alternative finance encourages entrepreneurial activity by providing the necessary resources for business creation, expansion, and innovation, ultimately contributing to the overall economic growth and development of the Philippines.
Also Read: Choosing the Right Business Loan for Your Company's Growth
Types of Alternative Finance Options Available For SMEs in The Philippines
The Philippines provides SMEs with a diverse array of alternative finance options that go beyond traditional banking options. These innovative funding solutions are designed to address the unique challenges faced by SMEs, providing them with the necessary capital to grow, innovate, and compete effectively.
From popular methods like crowdfunding and peer-to-peer lending to more sophisticated options like invoice financing and microloans, these alternative finance options offer greater flexibility, faster approval processes, and tailored financial products to help businesses thrive.
Here, take a look at the various types of alternative finance available for SMEs in the Philippines, along with their key features and benefits, to help business owners make the right financial choice -
1. Crowdfunding
Crowdfunding platforms allow SMEs to raise capital by collecting small amounts of money from a large number of people, typically via online platforms.
Platforms like The Spark Project enable businesses to present their ideas and projects to a wide audience, who can then contribute funds in exchange for rewards, equity, or simply out of support for the business.
2. Peer-to-Peer Lending
Peer-to-peer lending platforms connect SMEs directly with individual lenders. This method bypasses traditional financial institutions, offering potentially lower interest rates and more flexible terms.
Platforms such as First Circle provide these loans, giving entrepreneurs quick access to funds without the stringent requirements of conventional banks.
3. Invoice Financing
Invoice financing, also known as accounts receivable financing, allows SMEs to borrow money against their outstanding invoices. This provides immediate cash flow, enabling businesses to meet operational expenses while waiting for their customers to pay.
Companies like Acudeen offer invoice financing services in the Philippines, helping SMEs maintain liquidity and manage cash flow effectively.
4. Microfinance
Microfinance institutions provide small loans to entrepreneurs and small businesses that lack access to traditional banking services. These loans are crucial for startups and micro-enterprises, especially in underserved communities.
Organizations like CARD MRI and ASA Philippines Foundation offer microloans coupled with financial literacy training and support services.
5. Asset-Based Lending
Asset-based lending involves borrowing against the value of a company's assets, such as inventory, equipment, or real estate. This type of financing is particularly useful for SMEs that have substantial assets but may not qualify for traditional loans due to lower credit scores.
Asset-based loans provide flexibility and can be a viable option for businesses with fluctuating cash flows.
6. Merchant Cash Advances
Merchant cash advances provide SMEs with a lump sum of cash in exchange for a percentage of future sales. This type of financing is ideal for businesses with high credit card sales volumes, such as retail and hospitality sectors.
Repayments are made through a portion of daily sales, providing a flexible repayment structure.
7. Trade Credit
Trade credit allows SMEs to obtain goods or services from suppliers on credit and pay for them at a later date. This financing method helps businesses manage cash flow and maintain inventory without immediate cash outgoings.
Building strong relationships with suppliers can lead to favorable credit terms in future dealings and improved business operations.
8. Government Grants and Subsidies
The Philippine government offers various grants and subsidies aimed at supporting SMEs. Programs such as the Department of Trade and Industry’s (DTI) Shared Service Facilities (SSF) and Pondo sa Pagbabago at Pag-asenso (P3) provide financial assistance and resources to help businesses grow and improve their competitiveness.
9. Equity Financing
Equity financing involves raising capital by selling shares of the business to investors. This method does not require repayment, but it does involve giving up a portion of ownership and control.
Venture capital firms and angel investors are some of the popular and common sources of equity financing for SMEs looking to scale rapidly.
10. Fintech Solutions
Financial technology companies offer innovative financing solutions tailored for SMEs. These include online lending platforms, digital payment solutions, and financial management tools that streamline business operations and improve access to capital.
Fintech solutions are increasingly popular due to their convenience, speed, and accessibility.
Also Read: Top Legit Loan Apps for Long-Term Borrowing with Low Interest
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Advantages of Choosing Alternative Finance Options in The Philippines
Alternative finance options have gained significant traction in the Philippines, providing SMEs with innovative and flexible funding solutions beyond traditional banking.
These alternatives, such as crowdfunding, peer-to-peer lending, and microfinance, offer numerous advantages that cater to the unique needs of businesses in a dynamic economic environment. SMEs can access quicker, more adaptable, and often more inclusive financial support by opting for these alternative finance options.
Here, take a look at some of the key advantages of choosing alternative finance options in the Philippines -
1. Greater Accessibility
Alternative finance options are generally more accessible than traditional bank loans. They cater to a broader range of businesses, including startups and SMEs, that may not meet the strict requirements of conventional lenders.
2. Flexible Terms
Alternative finance solutions often come with more flexible terms and conditions. Whether it’s the repayment schedule, interest rates, or collateral requirements, these options can be tailored to suit the specific needs of the business, providing a more manageable and customized approach to borrowing.
3. Faster Approval and Disbursement
The application and approval processes for alternative finance are typically faster than those of traditional bank loans.
Platforms like peer-to-peer lending and crowdfunding can approve and disburse funds within a few days, allowing businesses to address urgent financial needs and take advantage of immediate business opportunities quickly.
4. Innovative Funding Models
Alternative finance introduces innovative funding models that not only provide capital but also engage a wider community of supporters and investors. This practice creates a sense of ownership and partnership that can be beneficial for the business’s growth and marketing.
5. Reduced Dependence on Traditional Banks
By diversifying their funding sources, businesses can reduce their dependence on traditional banks. This diversification in funding can lead to a more stable financial strategy, enabling businesses to handle economic fluctuations and credit constraints more effectively.
6. Support for Underserved Sectors
Alternative finance plays a crucial role in supporting underserved sectors, such as women-led enterprises and businesses in rural areas.
Microfinance and other inclusive financial products help bridge the gap and promote economic development and entrepreneurial activity in regions that might otherwise be neglected.
7. Building Credit History
Accessing alternative finance can help businesses build their credit history. Successful repayment of these loans can enhance the business’s credit profile, making it easier to secure traditional financing in the future under better terms.
8. Access to Expertise and Mentorship
Many alternative finance platforms, especially those offering equity financing or participating in business accelerators, provide additional benefits such as mentorship and business advisory services.
9. Community and Market Validation
Crowdfunding, in particular, offers the advantage of market validation. A successful crowdfunding campaign indicates a strong market interest and demand for the product or service, providing valuable feedback and enhancing the business’s credibility.
10. Empowerment through Technology
Fintech solutions and digital platforms make accessing alternative finance more convenient and efficient. Businesses can apply for loans, track their finances, and interact with investors all online, streamlining their financial operations and making the process more transparent.
Also Read: 6 Things You Need for Small Business Loan Requirements
Challenges Faced by SMEs When Applying For Alternative Finance in The Philippines
While alternative finance offers numerous benefits to SMEs in the Philippines, it is not without its challenges. Availing of non-traditional funding sources in the Philippines can be complex, and SMEs often encounter obstacles that hinder their ability to secure the necessary capital.
These challenges range from limited awareness and understanding of alternative finance options to regulatory hurdles and the need for robust financial documentation. Hence, SMEs must understand what these difficulties are, as they must strategize and overcome certain hurdles to access alternative finance effectively.
Here, take a look at some of the crucial challenges faced by SMEs when applying for alternative finance in the Philippines in greater detail -
1. Limited Awareness and Understanding
Many SMEs are not fully aware of the range of alternative finance options available to them. This lack of knowledge can prevent them from exploring and utilizing these funding sources effectively.
Additionally, understanding the specific requirements and processes associated with each alternative finance option can be daunting for business owners unfamiliar with these mechanisms.
2. Regulatory and Compliance Issues
Navigating the regulatory landscape can be challenging for SMEs seeking alternative finance. The Philippines' financial regulatory framework can be complex, and complying with all relevant laws and regulations is essential.
This includes understanding the legal implications of different funding options and ensuring compliance with securities regulations, especially for equity-based crowdfunding and peer-to-peer lending.
3. Lack of Financial Documentation
Alternative finance providers often require robust financial documentation to assess the viability and creditworthiness of an SME. Many small businesses may lack the necessary financial records, such as audited financial statements, detailed business plans, and cash flow projections, which can hinder their ability to secure funding.
4. High Interest Rates and Fees
Some alternative finance options, such as merchant cash advances and certain types of microloans, come with high interest rates and fees. While these options provide quick access to capital, the cost of borrowing can be significantly higher compared to traditional loans, and it can potentially place a heavy financial burden on the business.
5. Shorter Repayment Terms
Alternative finance solutions often have shorter repayment terms, which can create cash flow challenges for SMEs. The pressure to repay loans quickly can strain financial resources, especially if the business does not generate sufficient revenue within the repayment period.
6. Limited Track Record
SMEs, particularly startups and newer businesses, may have limited operating history and credit track records, making it difficult to prove their creditworthiness to alternative finance providers.
7. Technology and Digital Literacy Barriers
Many alternative finance options, such as online lending platforms and crowdfunding, require a certain level of digital literacy and access to technology. SMEs that lack technological capabilities or digital skills may find it challenging to navigate these platforms effectively.
8. Investor’s Doubts
Securing funds through alternative finance methods like equity crowdfunding and venture capital involves convincing investors of the business's potential. SMEs must contend with the investor’s initial doubts regarding repayments, especially if their businesses are currently among the less established ones.
9. Market Validation and Competition
Crowdfunding and similar platforms often require a strong marketing effort to attract investors. SMEs need to validate their market and stand out in a competitive environment, which can be resource-intensive and challenging for small businesses with limited marketing budgets.
10. Uncertain Economic Conditions
Economic instability and market volatility can massively impact the availability and terms of alternative finance. During uncertain economic times, like inflation or recession, investors and lenders may become unwilling to take risks, making it harder for SMEs to secure favorable funding terms.
Also Read: Best Short-Term Business Loans for Fast Financing
When To Consider Applying For an Alternative Finance Option in The Philippines
Traditional bank loans, while familiar, often come with their very own hurdles, including lengthy processes and strict requirements. This is where alternative finance emerges as a powerful ally. However, with a diverse array of alternative finance options available, knowing when to consider them becomes crucial.
To make things a bit simpler, in this guide, we’ll explore the specific situations under which Philippine SMEs can take advantage of the speed, flexibility, and innovation of alternative financing solutions to push their businesses toward success.
Here, take a look at some of the important considerations for SMEs to remember when applying for an alternative financing option in the Philippines -
1. Startups and New Businesses
When launching a new business, securing traditional bank loans can be challenging due to stringent requirements and the lack of a proven track record. Alternative finance options like crowdfunding and microfinance are excellent choices for startups, providing the necessary capital to kickstart operations without the need for extensive collateral or credit history.
2. Insufficient Collateral
Traditional lenders often require significant collateral to secure a loan. If your business lacks sufficient assets to meet these requirements, alternative finance options such as peer-to-peer lending and unsecured microloans can provide the funding you need without demanding substantial collateral in exchange.
3. Poor Credit History
Businesses or individuals with poor credit scores may find it difficult to obtain loans from conventional banks. Alternative finance providers often have more lenient credit requirements, focusing instead on the viability of the business idea or other factors. This makes it easier for those with less-than-perfect credit histories to access necessary funds.
4. Need for Quick Funding
When facing urgent financial needs or unexpected opportunities, the lengthy approval processes of traditional loans may not be ideal. Alternative finance options like merchant cash advances and invoice financing offer faster approval and disbursement times, enabling you to access the capital required to address immediate financial concerns quickly.
5. Innovative Projects
If you have an innovative business idea or project that traditional lenders may find too risky, alternative finance options such as equity crowdfunding or venture capital can be more suitable. These platforms connect you with investors who are more willing to take risks on innovative and high-potential ventures.
6. Cash Flow Management
Managing cash flow can be challenging, especially for small businesses dealing with delayed payments from clients. Invoice financing allows businesses to borrow against their outstanding invoices, providing immediate cash flow to cover operational expenses while waiting for client payments.
7. Expanding Business Operations
When planning to expand your business, whether through opening new locations, scaling production, or entering new markets, alternative finance can offer the flexible funding needed for growth. Options like peer-to-peer lending and trade credit can support your expansion plans without the stringent requirements of traditional loans.
8. Lack of Access to Traditional Banking Services
In rural or underserved areas, access to traditional banking services may be limited. Microfinance institutions and other alternative finance providers often target these regions by offering financial services to businesses and individuals who might otherwise be excluded from the formal financial system.
9. Flexible Repayment Terms
Alternative finance options often come with more flexible repayment terms compared to traditional loans. If your business needs a repayment schedule that aligns better with its cash flow patterns, options like revenue-based financing or merchant cash advances, where repayments are tied to business performance, can be beneficial.
10. Seeking Additional Support and Mentorship
Many alternative finance platforms, especially those offering equity investments, also provide valuable mentorship and business advisory services. If you are looking for not just funding but also strategic guidance and networking opportunities, considering alternative finance options can be highly advantageous.
Also Read: Pros and Cons of Debt Consolidation in the Philippines
Regulations Affecting Alternative Finance in the Philippines
The alternative finance sector in the Philippines has grown significantly, offering diverse funding options for businesses and individuals; however, this growth is accompanied by a complex regulatory landscape designed to protect both lenders and borrowers while ensuring the stability and integrity of the financial system.
Regulations affecting alternative finance involve various aspects, including licensing, transparency, consumer protection, and anti-fraud measures. Hence, understanding these regulatory frameworks adequately is essential for businesses and investors to navigate the alternative finance market effectively.
In this section, we will take a look at some of the important regulations impacting alternative finance in the Philippines. Apart from the importance, we’ll also be highlighting why it is important for you to comply with these regulations and what role regulatory bodies play in developing a safe and conducive environment for financial innovation.
The important regulations that impact alternative financing for SMEs in the Philippines are -
1. Securities Regulation Code (SRC)
The SRC regulates the offer and sale of securities, including those offered through crowdfunding platforms. Crowdfunding issuers must comply with registration requirements unless they qualify for an exemption.
This ensures transparency and investor protection by requiring detailed disclosures about the business and the risks involved.
2. Bangko Sentral ng Pilipinas (BSP)
The BSP oversees financial institutions, including those engaged in alternative finance activities like peer-to-peer lending and digital payments.
The BSP's regulations ensure that these institutions maintain financial stability, protect consumer interests, and comply with anti-money laundering (AML) and counter-terrorism financing (CTF) standards.
3. Anti-Money Laundering Act (AMLA)
Under AMLA, all financial institutions, including alternative finance providers, must implement measures to prevent money laundering and terrorist financing.
This includes customer identification procedures, transaction monitoring, and reporting suspicious activities to the Anti-Money Laundering Council (AMLC).
4. Microfinance NGOs Act (Republic Act No. 10693)
This act provides a regulatory framework for non-governmental organizations (NGOs) involved in microfinance. It aims to enhance the role of microfinance in poverty alleviation by offering tax incentives and streamlined regulations for qualified microfinance NGOs.
5. Credit Information System Act (CISA)
CISA mandates the creation of a centralized credit information system to improve the transparency and reliability of credit information.
This system helps alternative finance providers assess the creditworthiness of borrowers, thereby reducing the risk of default and improving access to credit for SMEs.
6. National Privacy Commission (NPC) Regulations
The NPC enforces data privacy laws, ensuring that alternative finance platforms protect the personal information of their users. Hence, compliance with the Data Privacy Act of 2012 is crucial for maintaining user trust and avoiding legal penalties.
7. Financial Technology (Fintech) Regulatory Sandbox
The BSP has introduced a regulatory sandbox to encourage innovation in the fintech sector, including alternative finance.
This sandbox allows fintech companies to test new products and services under a controlled environment, with regulatory oversight to ensure consumer protection and financial stability.
8. Securities and Exchange Commission (SEC) Rules
The SEC regulates entities engaged in securities-based crowdfunding and peer-to-peer lending. These regulations require platforms to register with the SEC, comply with specific disclosure requirements, and ensure that investors are aware of the risks involved.
9. Republic Act No. 11057 (Personal Property Security Act)
This law facilitates the use of personal property as collateral for loans, thereby improving access to credit for SMEs. It establishes a unified and modern legal framework for securing transactions, benefiting alternative finance providers and borrowers alike.
10. Consumer Protection Framework
Both the BSP and SEC have established comprehensive consumer protection frameworks to safeguard the rights and interests of users of financial services, including those engaged in alternative finance. These frameworks cover aspects such as transparency, fair treatment, and redress mechanisms.
Conclusion
Alternative finance has emerged as a crucial component of the financial ecosystem in the Philippines, providing businesses with innovative funding solutions beyond traditional banking, but it also comes with certain drawbacks and hurdles that Filipino entrepreneurs must be aware of.
That is why understanding its role in business funding involves exploring various types of alternative finance, such as crowdfunding, peer-to-peer lending, microfinance, and invoice financing. These financing methods offer significant advantages, including greater accessibility, flexible terms, and faster approval processes, which are particularly beneficial for startups and SMEs in the Philippines.
However, as mentioned earlier, as good as this type of financing is, businesses must also be aware of the specific challenges associated with alternative finance, such as limited awareness, regulatory compliance issues, and potentially higher costs.
Hence, it is imperative for entrepreneurs to recognize the appropriate circumstances under which to consider alternative finance, such as for quick funding needs, insufficient collateral, or poor credit history, which can help them make the right financial call for their businesses and help them grow for the long term.
Frequently Asked Questions (FAQs)
1. What is the role of alternative finance in the Philippines?
Alternative finance fills the gaps left by traditional lenders. It offers SMEs and startups faster approvals, flexible terms, and a wider range of options like crowdfunding or angel investors. This helps businesses access capital they might not qualify for with banks, providing them with extra funds for innovation and economic growth.
2. What are the risks of alternative financing?
While attractive, alternative financing isn't without risks. For starters, the interest rates offered can be higher than traditional loans, and some options involve giving up equity in your business. Thorough research is crucial as some platforms might be unregulated, and there's a chance you may not secure funding despite the application process.
3. What are the alternative financial mechanisms available in the Philippines?
Beyond traditional bank loans, a range of alternative financial mechanisms exist for businesses in the Philippines. These include:
- Crowdfunding: Raise capital from a large pool of people online.
- Peer-to-peer lending: Borrow directly from individual investors through online platforms.
- Invoice factoring: Sell outstanding invoices to a factoring company for immediate cash.
- Angel investors: Wealthy individuals invest their capital in exchange for equity or ownership stake.
- Venture capital: Firms invest in high-growth potential businesses for high returns.
4. Are alternative funds risky?
Yes, alternative funds can be risky compared to traditional investments like bonds or government securities. Here's why:
- Higher Potential Returns, Higher Potential Losses: Alternative funds often aim for higher returns, but that comes with the possibility of larger losses.
- Less Regulation: These funds may not be as heavily regulated as traditional investments, increasing the risk of fraud or mismanagement.
- Lower Liquidity: Exiting an alternative fund can be difficult compared to selling stocks or bonds. You might be locked in for a certain period.
- Complexity: Alternative investment strategies can be intricate, making it harder to understand the risks involved fully.