Germany: What is Alternative Finance and why is it needed or discussed?


What is Alternative Finance and why is it needed or discussed?

The need of alternative finance is easy to understand if you come across a statement similar to the following from a start-up entrepreneur in UK: “We found traditional forms of borrowing or financing virtually prohibitive in setting up our business. Our initial form of funding came through personal savings and private investment. And we made it through our first year by having watertight financial projections, targets and aims. Nonetheless, McPherson says, “Even with healthy cash flow, vibrant sales and positive financial forecasts we still found high street banks totally uninterested in assisting, even with the simplest requests.” Source: as of 05.09.2014 “Why alternative forms of finance are becoming popular among small firms” visited 30.12.2014.

Such statements are common but the specific need of people can be very different. Also the situation, in which an alternative finance option is needed can be at any stage in the life cycle of a company like ‘Seed’, ‘Start up’, ‘Growth’, ‘Established’, or even if the company is considered to be ‘Mature’.

The remaining question is what a lawyer can do if he finds a client in such situation and how to separate general moaning about business life from specific needs. Often a lawyer will wait for a concrete finance agreement, because he does not know the business of the client. This is a good attitude in general. However, a lawyer is also free to decide to get more involved in the business of the client. If this the general attitude of the lawyer the finance issue of the business is one of the main issues to get to know.

Accordingly alternative finance is like finance in general about equity finance and debt finance. With this in mind the easiest way is to define alternative finance is a) as mainly provided outside traditional banking institutions; and b) is covering equity finance and debt finance instruments.

The following equity finance instruments are major alternative Finance instruments: private equity, venture capital (including business angels), mezzanine-finance (debt-equity hybrids), employee success participation program/ stock options, crowd-investing.

The following debt finance instruments are major alternative finance instruments: factoring, factoring, leasing, corporate bonds, asset backed securities, loans of relatives, crowd-lending.

The legal framework for alternative finance instruments is not only new but it also develops currently. At the moment we have some Countries with a rather lose regulation and other Countries with planning to tighten up the regulation even for the newest development like crowdfunding. Accordingly the legal framework is very different in the different jurisdiction which makes a comparison between the different jurisdictions interesting. The huge advantage of the alternative finance setups is the use of a modern technology and the lack of traditional structure of the traditional banking industry.

In this issue of the corporate newsletter we will cover several legal issues on specific alternative finance instruments…