ALTERNATIVE By Varun Kumar

SOURCES OF FINANCE
INTRODUCTION
 Alternative sources of finance are those channels of finances that have
emerged outside of the traditional finance systems like the regulated banks and
capital markets.
 Alternative sources of finance come into the picture when an individual or a
company is not able to borrow money from the bank.
 Today, there are other alternatives available through which individuals and/ or
companies can arrange their finances. These are clubbed together and called
the Alternative Sources of Finance.
DIFFERENT TYPES OF ALTERNATIVE
SOURCES OF FINANCE

 The different types of alternative sources of finance are listed as below:

 Leasing
 Franchising
 Forfeiting
 Peer-to-peer Platform
 Crowdfunding
 Angel Investors
 Venture Capitalists
LEASING
 Leasing is the process by which a firm can obtain the use of certain fixed
assets for which it must make a series of contractual, periodic, tax-deductible
payments. A lease is a contract that enables a lessee to secure the use of the
tangible property for a specified period by making payments to the owner.
ADVANTAGES OF LEASING
 Flexibility and Convenience: The lease agreement can be tailor-made in
respect of lease period and lease rentals according to the convenience and
requirements of all lessees.
 Shifting of Risk of Obsolescence: The lessee can shift the risk upon the lessor
by acquiring the use of assets rather than buying the asset.
 Off-the-Balance-Sheet-Financing: Leasing provides “off-balance-sheet”
financing for the lessee in that the lease is recorded neither as an asset nor as a
liability.
DISADVANTAGES OF
LEASING
 Penalties On Termination of Lease: The lessee has to pay penalties in case
he has to terminate the lease before the expiry lease period.
 No Alteration in Asset: Lessee cannot make changes in assets as per his
requirement.
 High Risk of Obsolescence: The Lessor has to bear the risk of obsolescence
as there are rapid technological changes.
 Long term Investment: Leasing requires the long term investment in the
purchase of an asset and takes a long time to cover the cost of that asset
FRANCHISING
 Franchising is an arrangement where franchisor (one party) grants or licenses
some rights and authorities to franchisee (another party). Franchising is a well-
known marketing strategy for business expansion.
 A contractual agreement takes place between Franchisor and Franchisee.
Franchisor authorizes franchisee to sell their products, goods, services and give
rights to use their trademark and brand name. And these franchisee acts like a
dealer.
 In return, the franchisee pays a one-time fee or commission to franchisor and
some share of revenue. 
FRANCHISING
EXAMPLE OF FRANCHISING
 The leading fast food company has been franchising since 1955 as a
predominant way of doing business. In fact, out of the 38,695 restaurants that
McDonald’s has worldwide, 36,059 are operated by franchisees, and only
2,636 by the company itself.
 Some requirements to open a McDonald’s franchise include:
 An initial down payment of minimum $500,000 in liquid cash;
 A franchise fee of about $45,000;
 A good credit history;
 Significant business experience;
 The ability to develop and execute a business plan
ADVANTAGES OF
FRANCHISING
 Support and Training- Benefit of working with this business model is that you can usually
expect an ongoing support and training from the franchisor. This means that they will guide
you into the right way to begin developing your business, which increases your chances of
succeeding.
 Lower risk- Next benefit of operating a franchise business is that you have a lower risk for
failing compared to a newly-established company. Generally, franchises tend to be a more
secure investment because they use models that have already been tested
 Brand recognition- A big benefit that franchisees receive when opening a franchise is brand
recognition. If you start a business from scratch, you would have to build your brand and
customer base from the ground up, which would take time.
DISADVANTAGES OF
FRANCHISING
 Initial cost-While the initial investment of the franchise fee buys a lot of benefits for the
franchisee, it can also be costly especially if you’re joining a very well-known and profitable
franchise.
 Lack of financial privacy- Another disadvantage of franchising is a lack of privacy. The
franchise agreement will likely stipulate that the franchisor can oversee the entire financial
ecosystem of the franchise.
 Negative publicity: In case the franchising business gets negative publicity due to the actions
of the franchisor or another franchisee, the entire brand would suffer. This could lead to loss of
sales or customers for a franchisee that was not involved in that act as well.
FORFAITING
 Forfaiting is a method of trade finance that allows exporters to obtain cash by
selling their medium and long-term foreign accounts receivable at a discount
on a “without recourse” basis.
 A forfeiter is a spe­cialized finance firm or a department in a bank that performs
non-recourse export financing through the purchase of medium and long-term
trade receivables.
 “Without recourse” or “non-recourse” means that the forfeiter assumes and
accepts the risk of non-payment.
HOW FORFAITING WORKS
 The exporter approaches a forfeiter before finalizing the transaction’s structure. Once the
forfeiter commits to the deal and sets the discount rate, the exporter can incorporate the
discount into the selling price.
 The exporter then accepts a commitment issued by the forfeiter, signs the contract with the
importer, and obtains, if required, a guarantee from the importer’s bank that provides the
documents required to complete the forfaiting.
 The exporter delivers the goods to the importer and delivers the documents to the forfeiter
who verifies them and pays for them as agreed in the commitment.
 Since this payment is without recourse, the exporter has no further interest in the financial
aspects of the transaction and it is the forfaiter who must collect the future payments due from
the importer.
EXAMPLE OF FORFAITING
FORFAITING
Advantages of Forfaiting
 As the banks of both exporter and importer are involved, the risk becomes very
low.
 Forfaiting ensures immediate cash to the exporter who is protected from the
risk of non-payment by the importer
Disadvantages of Forfaiting
 Only major selected currencies are taken for forfaiting, as they possess
international liquidity.
 No international credit agency to guarantee in case of default
PEER-TO-PEER PLATFORM
 Peer-to-peer (P2P) lending enables individuals to obtain loans directly from
other individuals, cutting out the financial institution as the middleman.
Websites that facilitate P2P lending have greatly increased its adoption as an
alternative method of financing.
 P2P lenders are individual investors who want to get a better return on their
cash savings than a bank savings account or CD offers.
 P2P borrowers seek an alternative to traditional banks or a better rate than
banks offer.
EXAMPLE OF PEER-TO-PEER
PLATFORM
ADVANTAGES OF PEER-TO-
PEER PLATFORM
 Access to lower rates- Borrowers can sometimes have access to loans with
interest rates that are lower than in case they have obtained a loan in a
traditional manner like from banks and building societies. 
 Choice- The person can choose whether he or she wants to lend to, based on
the credit profile of the borrower.
 Risk diversification- Since this platform has found access it lets the capital be
spread across multiple loans which enables it to diversify the risks.
DISADVANTAGES OF PEER-
TO-PEER PLATFORM
 Legislation- Peer-to-peer lending is not allowed in all jurisdictions. Some
jurisdictions like Australia, Argentina, Canada, New Zealand, and the United
Kingdom require such platforms to comply with investment regulations.
 Risk of credit- The P2P lending platforms are generally the ones that have
high credit risks since the borrowers applied through these platforms have a
low credit rating and it does not allow them to obtain traditional loans from the
bank.
 CROWDFUNDING
 Crowdfunding is the use of small amounts of capital from a large number of
individuals to finance a new business venture. 
 Crowdfunding makes use of the easy accessibility of vast networks of people
through social media and crowdfunding websites to bring investors and
entrepreneurs together.
 Crowdfunding helps improve the presence of small businesses and startups across
social media, it increases their investment base, and funding prospects.
CROWDFUNDING
ADVANTAGES OF
CROWDFUNDING
 It can be a fast way to raise finance with no upfront fees
 pitching a project or business through the online platform can be a valuable
form of marketing and result in media attention
 investors can track your progress - this may help you to promote your brand
through their networks
 it's an alternative finance option if you have struggled to get bank loans or
traditional funding
 sharing your idea, you can often get feedback and expert guidance on how to
improve it
DISADVANTAGES OF
CROWDFUNDING
 failed projects risk damage to the reputation of your business and people who
have pledged money to you
 if you haven't protected your business idea with a patent or copyright, someone
may see it on a crowdfunding site and steal your concept
 if you don't reach your funding target, any finance that has been pledged will
usually be returned to your investors and you will receive nothing