Need that extra boost to get an export idea off the ground but it doesn’t fit EFIC (Export Finance Investment Corporation) guidelines? What is peer-to-peer lending? Could that help? Or would crowdfunding help me more? What are fintechs – should they be part of the picture?
The report Alternative Finance in Australia: Private investment, disruption, fintechs & crowdsourcing looks at the current state of the Australian economy and private company investment and describes some of these alternative funding mechanisms.
Given that 14.2 percent of small businesses and 11 per cent of medium size firms identify lack of finance as an obstacle to the growth and the development of their business, this is an important topic for Australia and for the engine room of NSW, Western Sydney in particular.
Digital disruption has influenced alternative finance and technology has disturbed the traditional methods of gaining loans and raising funds.
The current options available to private business in Australia to obtain capital are debt funding through banks, venture capital and angel funding. These traditional methods are not always available and can be time consuming and costly.
Through the internet, social media and e-commerce, people are able to raise funds by exposure to a wider audience rather than traditional methods.
Alternative finance, in particular crowdfunding, is set to continue to grow in line with internet and smart phone growth globally. The crowdfunding market grew 167% between 2014 and 2013.
In essence, Deloitte’s report Alternative Finance in Australia is about how to support small business. Western Sydney is a region in growth through SMEs and defined by entrepreneurism.
For a region like Western Sydney – this is the future. Western Sydney and Sydney as a whole is at the heart of this movement, with 950 tech start-up businesses in Sydney
What is crowdfunding?
Crowdfunding enables everyday people to become a micro-financer/investor to all types of ideas and projects. People themselves power business growth, rather than banks or markets. The process is simplified and revolutionised.
Technology bridges the gap between those who want to invest money and those who need it. This appeals to consumers as the behaviour is shifting for ease of service and transparency.
There are four crowdfunding models: equity-based, debt-based, rewards-based and donations-based crowdfunding.
Of these four, they fall into two overarching types of crowdfunding: financial and non-financial – essentially meaning if an individual expects financial return from their contribution.
Equity-based and debt-based are categorised as financial, while rewards-based and donations-based fall into non-financial.
Equity-based crowdfunding
Through equity crowdfunding, the crowd is able to become shareholders. A company sells shares for money to grow their business. This is mostly used by start-ups and SMEs.
Debt-based crowdfunding
Debt-based crowdfunding, also known as peer-to-peer lending, is where an individual or a company use a crowdfunding platform to borrow money from a group of people.
Borrowers do not need to provide a guarantee or security to the ‘lenders’. With low overhead costs and removing the bank’s margin, it is considered a faster and simpler process compared to traditional bank loans.
Rewards-based crowdfunding
Rewards crowdfunding is where the contributors to businesses and causes receive a tangible non-financial return such as a CD, DVD or a T-shirt.
Donations-based crowdfunding
Donations-based crowdfunding has become popular as it works well with the natural design of raising money for causes.
Interactions on social media and crowdfunding platforms enable targeted campaigns and it establishes a connection between the participants and the social cause they are supporting.
For example, rather than the ubiquitous ‘orphans in Africa’ donations can be funnelled to a specific orphanage in a specific village in Tanzania.
The future of funding
Technology is reaching and changing all dimensions of what we have been used to. Alternative finance and fintechs are just the latest forms of digital disruption.
Crowdfunding enables people to control their own assets and help out others. In turn we can invest in an innovative and high growth future for Australia through the businesses that underpin our economy.
*Alternative Finance in Australia was produced by Equitise along with Deloitte Australia and Piper Alderman. Equitise enables Aussie (www.equitise.com.au) and Kiwi (www.equitise.co.nz) startups to raise capital in an intuitive, simple and social way.
