Marketplace Lending For Your Invoices

  • KredX Editorial Team
  • 20 Jan 21
  • business
Do you know the world's first marketplace lending, ZOPA, was founded in 2005 in the United Kingdom? In its initial stage, the marketplace lending structure served as a platform, which facilitated contact between borrowers and lenders directly or through peer-to-peer. Over the years, this type of lending system has undergone several changes and has evolved in terms of both size and functionality.  As per the latest data, in 2021, the transaction value in marketplace lending with regards to the consumer segment is expected to touch 14 million. On that note, let us glance through the underlying concept of marketplace lending and how it has facilitated business borrowing experience over the years. 

Marketplace Lending - A Brief Introduction

Fundamentally, marketplace lending is a non-banking financial institution-based funding source where businesses that need capital can raise funds directly from lenders.  You must note that marketplace lending is based on a well-knit system with the following characteristics - 
  • A Digital Platform – It is a software solution, which is open to users onboard. 
  • Multi-tenant – The system allows multiple parties to work on the application without being exposed to the risk of a data breach or privacy issues.
  • Multiple Parties – It brings together multiple parties who have varying interests and end requirements. However, the number of parties involved is not necessarily limited to two. 

How Does Marketplace Lending Work?

Ever wondered how banking institutions provide funds to borrowers?  The entire business model of banking institutions is based on deposits and lending money to businesses and borrowers.  However, when it comes to marketplace lending, the institutions neither take in any deposit nor lend money of their own. Instead, they serve as a platform, helping lenders match with borrowers directly.  You should know that because marketplace lenders do not lend funds on their own, they do not earn any interest income. They also do not hold any capital to absorb losses.  Are you wondering how they earn through an arrangement? Typically, these institutions generate earnings through fees and commissions they levy on the borrowers and lenders.   

A Walk Through The Salient Features

These are among the most vital features of marketplace lending –
  • A Single Platform

The most noteworthy feature of marketplace finance is that it brings lending, IT, and management experience on the same platform. In other words, it serves as a one-stop fintech solution that is seamless and effective.
  • Parties Involved

Ideally, in marketplace finance set up, there are multiple parties involved. For instance, it involves parties like producers, consumers, brokers, dealers, etc.
  • Earnings 

Marketplace lenders generate income in the form of interest. They earn money in the form of fees and commissions. Note that such fintech platforms do not lend money from deposits, so they do not have to bear the liability of any loss as such.
  • Risk Evaluation

Individuals who decide to invest in company invoices are not exposed to high risks. It is mostly because these fintech establishments use traditional financial strategies like evaluating creditworthiness and publicising risks openly. 
  • Transparency 

These financial institutions offer full details of the prospective borrowers to the lenders. Such an approach ensures transparency and further provides control to lenders. Other than this, there is no maturity transformation involved in the system of marketplace lending. You must also note that though individuals tend to use the term 'peer-to-peer finance' interchangeably with marketplace finance, technically, they are quite different.

Difference Between Marketplace Lending And Peer To Peer Lending

Peer-to-peer lending involves two parties, namely – lender and borrower. Generally, in the case of peer to peer financing individuals lend funds to borrowers directly. When a business opts for this lending process, they avail a new loan and have to repay it within a given period.  On the other hand, in a marketplace lending platform, non-financial institutions or investors provide funds against company invoices. In other words, it serves as a useful place where businesses can raise funds against their unpaid invoices. It essentially helps businesses to avail funds without increasing their burden. Usually, what works for marketplace financing platforms is that businesses do not necessarily avail of a new loan. Instead, they access funds against their outstanding invoice's value. In other words, the account receivables of the business approaching this financing platform get converted into cash. However, companies have to pay a small fee or commission to avail of invoice discounting service.

Bottom Line

Marketplace lending has helped individuals to access funds as and when required in a more streamlined manner. Nevertheless, as a person in need of capital, you must select an invoice financing platform that extends substantial funding at reasonable terms of service.