Marketplace lending is a growing alternative to traditional
financial services for consumers and small businesses. Some banks have already
entered the principle of marketplace lending business as investors or
arrangements via third-party since they see opportunities to grow their
Though many small business owners now want to try
marketplace lending, it is essential to understand and manage the risks to
avoid financial loss.
If you are new to marketplace lending, here's a short overview before you dive in and participate in this financial practice.
What is Marketplace Lending?
Marketplace lending connects small-medium and consumer
enterprises or SMEs interested in borrowing loans with individuals or
institutions. One of the marketplace lendings you can seek for that matter is Crowdproperty Australia.
Most products that marketplace lending features are short
maturities, direct debit repayments, and accounting software integration.
To briefly explain the process, a financial service provider
or facility will act as the â€œmarketplaceâ€ through an online platform. That way,
the financing process will have a more streamlined delivery with low operating
costs since many transactions are online nowadays.
The platform provider may originate or service the loans depending on the business model, price, and underwriting. Compared to traditional lending, the process takes several days or weeks, while marketplace lending only takes several hours.
Characteristics of Marketplace Lending
Marketplace lending has complex characteristics based on the
business model. But these are the most common ones you will often encounter
once you participate in this financing process.
- Individuals and SMEs are mostly the basis of the loan
- Marketplace lending processes are 100% online, and no
physical or face-to-face interaction.
- Issuing equity and parties that sell loans to investors
fund the marketplace lenders.
- Underwriting is 100% algorithmic and automated.
Difference Between Marketplace Lending and Balance-sheet Lending
When applying for a loan, the lender will typically ask about
your creditworthiness by checking your income, credit score, etc. The same
principle applies to marketplace lending and balance-sheet lending.
If you apply for a loan, you must submit your bank and tax
records and concrete business plan. That way, the lender can come up with a
decision based on your requirements.
The only thing that sets marketplace lending from balance-sheet lending is that it does not ask you for a lien on a property or asset.
Difference Between Marketplace Lending and Peer-to-Peer Lending
Peer-to-peer or P2P lending is the traditional way of
offering loans to individuals and businesses, especially in countries with
developing financial industries.
In a P2P setup, the lender will only allow individuals with only hundreds or thousands of dollars to invest in making loans to peers who want to borrow similar amounts. But things changed when banks and other major financial institutions took over and became more active in processing loans.
Many people will appreciate the opportunity opened by
marketplace lending as it has a quicker and more integrated procedure, unlike
traditional lending. But with the growing participation of individuals and SMEs
in the marketplace lending financial, every participating institution should also
ascertain the risk involved.