Alternative Finance as a Source of Passive Income

While we all enjoy having sufficient funds in our bank accounts, most of us hate to see them sitting there and not doing any work.

You have already invested your efforts into getting the money in the account, why not let the money do some work and bring some additional passive income.

Using different saving accounts is one way of doing it, however, if that is not satisfying enough, you can choose to invest in shares which can be risky or alternative business loans which is a bit safer option with high-interest rates.

the correct way

Peer-to-Peer Lending

What is it? Peer-to-peer lending is designed for those individuals and small and medium enterprises who cannot get or do not wish to apply for a conventional loan with a bank as a lender. This usually happens due to bad credit score which cannot justify the amount requested. Certain borrowers have even given up on waiting to be turned down by a bank and are taking their requests straightforward to lending platforms where they can build a reputation with time and borrow at better terms. These P2P loans are famous for their high-interest rates which makes them particularly interesting as an investment. These loans can be anywhere between $1000 and roughly $40,000 depending on a platform and regulations.

How does it affect you? As an investor, you will be buying a part of a loan and, on average, you will get your money back within 12 to 60 months with an annual interest rate of 5%-8% depending on the platform and the loan. You can expect the repayment of the loan in the form of monthly installments.

What are the risks involved? Even though the platforms apply certain criteria when it comes to borrowers and loans, you are still facing the risk of losing the money you have invested in the instance that the borrower fails to repay the loan. This is why you should be careful when choosing where to place your investment. According to Investopedia, top 3 P2P lending platforms are Upstart, Funding Circle, and Prosper Marketplace.

Invoice trading

What is it? Through an invoice trading platform, businesses can sell their invoices in order to get the cash necessary for further business activities. Overdue invoices can often disrupt the chain of supply. This way, if a business is awaiting funds from their customers and they have to pay the suppliers, they do not have to wait and everyone is satisfied. This is only one way of using the funds, but not necessarily the only one. The invoices can be anywhere between $1000 and even over one million.

How does it affect you? Similarly to peer-to-peer lending, as an investor, you will get to buy a share of an invoice. The interest rates can be higher than those of the loans, from 8% to 18%, depending on the platform, the business, and the invoice. These are short-term investments and you can expect the full return within a couple of months. In case you change your mind, you can sell your part further on a secondary market.

What are the risks involved? Since all of the invoices are verified first, your investment will be safe and the only way it could go wrong for you is in case of a dispute between the business and the debtor. Should this happen, the accounts receivable of the business who sold the invoice are used as a security for covering the losses.

Equity crowdfunding

What is it? Crowdfunding is a handy way now available to those seeking investors for starting up their business. A great number of people can invest in a single business and help its beginnings. In return, they will receive equity shares. This means that, upon the purchase, they will own a part of the business. You need to read the rules before you make your decision, but when it comes to minimal investments, the SEC, as a part of the US federal government, has made it a rule for their citizens not to be able to invest less than $2,000.

How does it affect you? Since at this point we’re looking at private equity, in order to earn money through these investments, you will need to wait for the company to go public and start trading their shares publicly. In this case, you will have no problem selling the shares whenever you decided and hopefully, they will be worth more than what you paid for them initially. If the owner decides to sell the company, you can get the return on your investment once the company is acquired. Alternatively, you can sell your shares on a secondary market but there will be no guarantee of the positive return on your investment. These are long-term investments so do not hope to get an immediate return, in the meantime, if the start-up you have invested in is doing well, you can enjoy the dividends.

What are the risks involved? Equity crowdfunding is considered to be a high-risk investment. If you purchase shares of a small business, not to mention a startup, you can get them at a very affordable price. Consequently, the return on your investment will be great once and if the business grows and can be considered successful. However, this is not always the case, so do not keep all of your savings tied to an unreliable investment. Should it happen that the business of your choice fails and you can no longer hope to sell the shares, there are usually securities offered to cover the losses.

The alternative finance niche is still growing at this point in time, with peer-to-peer loans being a leader. There are many ways you can invest. Different countries apply different laws to these types of financing so before you decide to place yourself on either side of this financial route, whether as a ‘borrower’ or the investor, you should get familiar with the laws that apply in your area. Also, beware and look for appropriate reputable platforms as an intermediary for your investments, as you want to put your money in safe hands and they are your only way of knowing who to trust.

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