[Editor’s note: This is a guest post from Oleg Seydak, CEO at Blackmoon Financial Group, an emerging leader in the marketplace lending ecosystem.]
Marketplace lending and balance sheet lending are the main business models in the world of alternative lending.
Marketplace lending for lower risk
Marketplaces are financial intermediaries that originate loan portfolios for sale to investors. Marketplace lenders collect a service fee throughout the loan’s duration, and an upfront origination fee, while giving up the interest on the portfolio, reducing their overall return. But in exchange for a reduced return, they reduce their exposure to risk of loan defaults, as this is passed to the investors. Beyond reducing both risk and profit, these transactions bring in new capital, allowing the lending companies to originate more loans and grow their business.
Marketplace lending companies typically focus on long-duration loans, such as unsecured consumer loans, small and medium enterprise (SME) loans, and real estate property financing. These are generally low-margin deals, so these companies often require lengthy and substantial capital investments from VC firms to ramp up operations to a breakeven point.