Alternative finance is a seriously hot topic right now. From worthy projects like a beehive design that received millions on Indiegogo — to the completely comic, like the crowdfunding campaign to make a potato salad — you can't really avoid the media buzz about alternative finance.
But there is more to alternative finance than hype. And there could be ways that the new products, services, and platforms can benefit you. (No potato salad required.) Here's how.
1. Invest While You Help Others With Peer Lending
Peer-to-peer lending is an increasingly popular choice for individual investors, who lend out their spare cash in the form of loans to individuals and small businesses. Peer lending is an attractive investment because it’s simple to get started, returns can be solid, and you can open accounts with very low minimum investments. The segment is getting increasingly sophisticated, with prospective borrowers vetted and classified according to risk, allowing investors to diversify their portfolio of investments according to their risk tolerance levels (riskier loans produce higher potential returns). Both Prosper and Lending Club also offer tax-smart IRA products. (See also: Everything You Need to Know About Peer Lending)
The key to investing intelligently in peer lending is in diversification. By splitting your money across dozens or even hundreds of different loans, you reduce your exposure to default.
2. Get a Loan Without Visiting a Bank
Peer lending, of course, works both ways. Not only can you invest your money, you can also become a borrower using one of the alternative finance platforms listed above. Accessing funds this way tends to involve less paperwork than visiting a bank, although interest rates will vary according to your circumstances.
There are peer lending platforms offering consumer and business loans, both secured and unsecured, ranging from small loans for individuals to the greater funds you might need for expanding your business. For example, Funding Circle offer loans to small businesses that might not be able to access finance through mainstream institutions. If you're thinking of taking a loan, it is worth evaluating alternative providers alongside traditional bank offerings. You might be pleasantly surprised.
3. Kickstart Your Business Idea With Crowdfunding
Alternative finance offers several options if you're thinking of starting a business. One popular option is reward-based crowdfunding, where backers pledge money in return for non-financial rewards. Not only does this provide a way of collecting some cash, but you can also test the feasibility of your idea — if people fund your campaign, then you've likely got a viable product!
Kickstarter is one of the best known crowdfunding sites and accepts “creative” projects — perfect if you're a writer, artist, chef, or looking to fund a business in the world of art, design, technology, or music. The rules prohibit offering financial incentives to backers, so you have to get inventive to come up with ways to say thank you to the people who fund your campaign!
Indiegogo is another great alternative. Simply sign up to start a campaign, and receive funding through PayPal from backers all over the world.
4. Use Crowdfunding to Fund Your Worthy Cause
Donation-based crowdfunding allows individuals, charities, and nonprofit organizations to raise funds for specific projects, with no reward or payback to the individuals who choose to become backers.
Gofundme is the go-to site for donation based crowdfunding — whether you are raising cash to study abroad, pay for medical expenses, or upgrade your home. The site focuses on charitable causes, which can really take off if the cause is good and has viral appeal. Some popular Gofundme causes have received hundreds of thousands of dollars in donations.
5. Become a Business Part-Owner With Equity-Based Crowdfunding
If you have money to invest, but aren’t ready to start your own entrepreneurial endeavor just yet, then equity-based crowdfunding can offer a way to become a part-owner of a business you believe in.
With equity-based crowdfunding, entrepreneurs offer a slice of their business to investors in return for their cash. You might choose a project you're excited about in your neighborhood, a product that makes sense to you, or an entrepreneur who has the energy and passion needed to really make their idea a success. Equity-based crowdfunding is working right now for many investors and small businesses — an impressive 120,000 backers have backed over 30,000 projects so far on Crowdfunder, alone.
6. Get Discounts and Offers Through Reward-Based Crowdfunding
Reward-based crowdfunding projects offer some form of non-monetary reward to those who back them. This might mean that you can get your hands on an early edition or personalized version of the product you're backing, have your contribution acknowledged on the company website or magazine, or get some form of exclusive reward direct from the founders. Generally, rewards are tiered based on the level of money put up, meaning the more you offer, the better the reward you can get your hands on.
Kickstarter and Indiegogo are two of the best-known sites for reward-based crowdfunding, but there are also niche sites which might suit your particular interests. If you're into music and love discovering new sounds, then specialist sites help budding artists raise funds in return for great gifts to backers. Give Pledge Music a whirl if this is your bag.