May 01, 2019

What Is a Lending Marketplace?

Lending marketplaces have reinvented the lending business, making financing faster to apply for and easier to qualify for. This hasn’t always been the case, however. In the not-so-distant past, loans mostly came from banks. If you needed to borrow money, you’d drive to your nearest bank and plead your case. The good news was that the banks had money to lend. The bad news was that the application process could take 30 hours and the majority of requests were denied.

If you were an entrepreneur who was just getting started, your prospects were particularly grim. Most banks commonly rejected applications from those who had been in business for less than 2 years or brought in less than $100,000 in revenue each year.

How lending marketplaces got started

As a wise person once said, “Necessity is the mother of invention.” In the case of lending marketplaces, that necessity came in the form of the financial crisis of 2008. Capital was harder than ever to come by and business owners needed more options for financing.

While the banks weren’t willing to play ball, plenty of lenders still would. There just needed to be a way to connect them with borrowers. Enter the modern lending marketplace.These lending marketplaces, built on a model of access and efficiency, proved to be an answer to the funding shortage. As more and more entrepreneurs took advantage of this new tool, lending marketplaces exploded in popularity. The US Department of the Treasury has noticed this trend, referring to marketplace lending as “a fast-growing sector that is continuously evolving.”

At the heart of the matter is the approval rate. If you go with a bank, you’ll be turned down about half of the time. Going through a marketplace boosts your chances of success to 70%. The streamlined nature of the marketplace process also cuts costs and red tape simultaneously.

“Designed as a two-sided platform structure, marketplace lending brings innovations to traditional banking on both the borrower and the investor side,” says the Harvard Business Review. “The innovation on the borrower side relies mainly on streamlining an online application process that uses low-cost information technology to collect standardized information from dispersed individual borrowers on a large scale.”

There’s no shortage of loan options

A lending marketplace usually offers a wide range of loan products. Due to the variations of dollar amounts, rates, and terms, it’s recommended that you speak with an expert any time you have questions. The best marketplaces provide advisors who can help you. The bottom line is that you never want to sign on the dotted line until you feel informed and ready to make a decision.

Here are the various loan options you can usually expect in a lending marketplace:

Business Line of Credit

With a business line of credit, you can get amounts between $1,000-$500,000. The money will be available in a week or so, with rates ranging from 8-24%. Because a business line of credit is revolving, you get ongoing access to your chosen amount of money rather than a lump sum.

SBA Loan

These types of loan range in amounts from $50,000 up to $5,000,000. SBA loans are famous for their generous terms and slow paperwork. It can take up to 3 months to receive your funds. A few of the most popular loan products are SBA 7(a) Loans, SBA 504 Loans, and SBA Express Loans.

Short Term Loan

These loans are among the fastest out there, providing money in as little as 24 hours. Short term loans are built for efficiency, with maximum amounts of $500,000 and terms of 1-3 years. Due to their fast funding, they’re perfect for situations where you need cash in a hurry.

Business Term Loan

A business term loan is a classic option for entrepreneurs. The amounts vary from $5,000 up to $2,000,000, and you’ll often have that money in just a few days. You can expect the terms to be 1-5 years, with interest rates starting around 6%.

Merchant Cash Advance

You borrow against future earnings with a merchant cash advance. Amounts range from $5,000 to $200,000, and you can acquire the money in a couple of days. After receiving your agreed-upon amount, you’ll start repayment by having a percentage withheld from your credit card deposits each day.

Business Credit Card

Due to minimal paperwork, a business credit card is one of the easiest types of financing to acquire. Amounts go up to $500,000, with interest rates ranging from 8-24%. This method of financing can be good for small business owners who have been repeatedly denied for loans in the past. It’ll provide a chance to get financing and work on bolstering your credit.

Equipment Financing

Just like the name suggests, equipment loans help you purchase equipment for your business. Amount go up to $5,000,000 with interest rates starting around 7.5%. Best of all, the money can be available after just a couple of days.

Lending marketplaces are here to stay

As lending marketplaces shake up the financing world, some people have wondered whether or not they’re just a flash in the pan. The experts at Deloitte analyzed mountains of data to help answer this question, concluding that marketplaces will remain a “permanent part of the landscape.” The reason? There will always be people who need money but who can’t get a loan through a bank.

The evolution of marketplaces will undoubtedly include more diverse loan product offerings and better ancillary benefits. For example, the Innovative Lending Platform Association has released a tool called SMART Box™ (Straightforward Metrics Around Rate and Total cost). It promotes clearer disclosure standards and provides pricing metrics and calculations to help you make informed decisions.

“Access to capital is a top priority for NSBA and we appreciate how SMART Box allows small businesses to more fully assess and compare lending options,” says Todd McCracken, president and CEO of the National Small Business Association. “This type of price transparency, along with best practices like the ones adopted by the Coalition for Responsible Business Finance (CRBF), will help solidify the trust between non-bank lenders and small businesses.”

There are 3 different versions of SMART Box™ customized for merchant cash advances, term loans, and lines of credit. And additional tools and resources are currently being developed.

This effort to create value undoubtedly benefits borrowers, which is why those in the lending marketplace industry are so motivated to provide it. After all, innovation is never easy. Rather than rest on their laurels, lending marketplace leaders must remain focused on their customers’ evolving needs to stay relevant and continue providing effective service.

About the author

Grant Olsen
Grant Olsen
Grant Olsen is a writer specializing in small business loans, leadership skills, and growth strategies. He is a contributing writer for KSL 5 TV, where his articles have generated more than 6 million page views, and has been featured on FitSmallBusiness.com and ModernHealthcare.com. Grant is also the author of the book "Rhino Trouble." He has a B.A. in English from Brigham Young University.

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