Marketplace lending uses online platforms to connect borrowers with investors willing to offer loans. The platform then collects interest and principal payments from borrowers and sends them to investors, keeping a fee. Marketplace lending offers both new loans and refinancing.
“Peer-to-peer” or “P2P” lending is a related term that isn’t used much anymore in countries with well-developed financial industries. When platform lending was new, part of its appeal was that it allowed individuals with only hundreds or thousands of dollars to invest to make loans to other people — peers — who wanted to borrow similar amounts. Over the years, banks and other major institutions became more active, crowding out true P2P lending. Although some developing economies still have robust P2P platforms, Sharestates is one of only a few remaining in the U.S. through which retail investors participate on par with institutional investors.
An FDIC report distinguishes between the two funding models. Specifically, the federal bank insurer refers to P2P as “direct funding” and the institutional version as “bank partnership”.
Balance-sheet vs. marketplace lending
The borrower’s income and creditworthiness form the basis for marketplace lending terms. Applicants prove these through tax or bank records or provide a forward-looking business plan. In some cases, lenders make decisions based entirely on the borrower’s self-declared statement. This differs from balance-sheet lending, which is another form of platform lending. Balance-sheet lending involves putting a lien on a property — an asset on the balance sheet.