Here’s what you need to know about marketplace lending vs. direct lending

marketplace lending

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When the 2008 Great Recession brought economic decline, traditional banks began to tighten lending restrictions. As a result, businesses in need of financing assistance had fewer options available to them. Two solutions gained significant popularity in order to fill this need: marketplace lending and direct lending.

But what is marketplace lending? How do these options differ?

When seeking financing for a small business, it is important to understand the different types of financial services. Let’s explore the differences between the two.

What is marketplace lending?

Marketplace lending, also referred to as platform lending, rose to prominence after the 2008 recession when both the need for financing and frustration with the lack of access to that financing grew.

Marketplace lenders use online platforms that are separate from traditional banks. These non-bank lenders connect borrowers to investors for funding.

This separation from traditional lending practices allows for additional flexibility so borrowers can find the best terms and rates. However, the marketplace lending industry still complies with anti-discrimination laws and regulations as well as adhering to various consumer protection regulations and privacy laws, similar to traditional lenders.

Marketplace lending leverages financial technology in its business models, enabling it to exist almost entirely online.

Underwriting relies heavily on automated processes to improve speed-to-funding in this sector, as this type of lending often relies on technology to determine the terms and loan amount. Borrowers may experience quicker approval time compared to traditional financing options.

In addition, a marketplace lender typically:

  • Connects individuals and small businesses to lenders
  • Exists without a physical retail space
  • Offers a diverse range of financial products
  • Leverages competitive rates and fees
  • Fosters transparent funding contracts through technology
  • Prioritizes data-informed decision-making and risk management

While marketplaces widen the range of options available, marketplaces are still firm with their requirements. However, when working with this type of lender, your loan application is often submitted to multiple lenders, meaning you may get more chances for approval if you get denied by one lender.

So, what is marketplace lending? In summary, it refers to online-driven lenders separate from traditional banking that utilize specific fintech business models. Commonly, these types of lenders prioritize speed to funding, data-driven decisions, and transparent funding processes.

The creation of this sector allowed borrowers to explore multiple funding options with lower qualification requirements than traditional banks. The lending space has rapidly evolved since the emergence of online marketplace lending, blurring the line of direct financing as the industry changes.

However, there are still key differences between marketplace lending and direct lending that are essential to know when choosing the best financial option.

Learn more about financing options for business:

How does marketplace lending differ from direct lending?

Let’s first answer the question: What is direct lending? Put simply, direct lending is the act of providing non-bank financing to businesses.

When you apply and secure funding through a direct lender, they handle everything from the approval, underwriting, and disbursement of funds from start to finish. There is no intermediary, like a bank, between you and the direct lender.

Direct lenders like Credibly provide business financing to business owners without the need for traditional bank channels and intermediaries like private equity firms. With this type of non-bank lending, the entire loan process happens within the same company.

Marketplace lenders, however, are not able to provide financing to business owners themselves.

Instead, marketplace lending companies match your application with different lenders to find the best fit for borrowing requirements. So, if you get denied by one lender, you can still be approved by another through a marketplace lenders list.

In other words, marketplace lenders don’t provide the funds themselves but instead partner with financial institutions to offer multiple types of loans to applicants.

Typically, direct lenders are also more specific with credit scoring and other stipulations. A marketplace loan offers more flexibility with requirements and a wider range of loan programs.

However, you can often find a lower interest rate through a direct lender and multiple sources of capital. Direct lenders personalize your loan agreement by allowing you to negotiate certain term aspects, such as repayment schedules and interest rates.

While there is some overlap between direct vs. marketplace lenders, they do have separate key characteristics.

A direct lender will:

  • Require a completed financing application
  • Evaluate the borrower’s credit score
  • Offer customized loan terms
  • Act as the loan originator
  • Collect the loan payments

On the other hand, a marketplace lender will:

  • Assign credit grades based on automated scoring
  • Advertise the funding request to their partners
  • Offer multiple financing options for the business owner to explore

Ultimately, marketplace lending platforms act as bridges for borrowers to direct lenders. Marketplaces provide marketplace loans only through the help of direct lenders, so the direct lender provides the actual financing.

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The future of lending

As the fintech space grows, the lending industry will rapidly evolve with it. Changes in technology, economies, and consumer demands will impact the lending landscape in a variety of ways:

  • Digitized processes: The funding process for businesses will become increasingly integrated with technology as more companies adapt to online platforms. As lenders continue to automate creditworthy assessments, borrowers will be able to secure financing with a shorter approval process and less paperwork.Technological advancements will increase speed-to-funding, as well as smooth out the application process. This means overall easier access to funding, leading to an improved lending experience.
  • Alternative financing: Funding options like merchant cash advances will likely become more popular as new platforms create more funding opportunities. The industry will experience rapid changes as new financial products and services are introduced in response to borrower demands.
  • Personalized lending: As access to data increases, lenders can tailor their funding agreements to the borrower’s needs. Financing will become increasingly personalized as companies increase their data analysis processes. For small businesses, this means greater flexibility with personal circumstances, such as an adaptable repayment plan.
  • AI integration: As data analytics capabilities improve, artificial intelligence will play a crucial role in the funding process. Financers will adapt AI algorithms to analyze large data sets, such as a borrower’s financial information. AI integration will become increasingly used for more accurate and efficient credit risk assessments.
  • Regulation changes: As this sphere evolves, the policies to protect the integrity of lending will shift as well. Regulators will have to consider the implications of new technologies, keeping in mind the safety and security of consumers. The changing atmosphere of data and privacy practices will result in new cybersecurity measures.

It’s fair to say that both direct and marketplace lending will keep evolving as new technologies emerge.

Ultimately, the future of lending should work to increase the accessibility of business financing for merchants. The financing experience itself should also improve as artificial intelligence becomes more integrated into the lending process.

As the business financing sphere continues to face significant advancements, financing companies like Credibly are making sure to embrace emerging technologies with the goal of improving the overall customer experience.

Ready to learn more about your financing opportunities?

At Credibly, we understand that navigating the changing world of lending can be challenging.

Whether you prefer the simplicity of direct lending or the flexibility of marketplace lending, our financing experts are ready to guide you through the best solution for your business.

With our streamlined, fully online process, you can secure funding quickly and focus on what matters: growing your business.

Speak with a financing expert today.

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