With alternative lending becoming a more prominent part of modern business, it is important to stay abreast of changes in the industry. Composite lending is a mixture of different models and brings with it a great deal of benefits from marketplace lending.
Composite lending as a model combines two common models: balance sheet lending and marketplace lending. In effect, it brings in the benefits of both to the same model. Balance sheet lenders focus on specializing their loans, using shorter term high rate loans or merchant cash advances. Generally, these types of loans focus on profitability over a short period of time. Alternative lending lowers the risk of investments by transferring it to investors, but drops the overall interest rate of the loan. Composite lending as a model hopes to bring these both together.
By combining the parts of the balance sheet model with marketplace lending, the composite model creates a bridge between the two. The model retains part of the portfolio on the balance sheet funded by the company’s capital. This is done while using marketplace lending to obtain outside investors to finance the rest. These two models, when brought together, can offset the risk while maximising returns quickly.
If you ask a composite lender why it is a better choice, they will tell you that moving forward from a balance sheet to this model of composite lending helps every rung of the ladder. The initial company sees a high return on their portfolio, while still collecting fees from the newly originated portfolio. As a result of the newly originated loans being sold to investors, the lender doesn’t have as much risk associated with the portfolio too. This brings great benefits, and it allows for massive scalability with marketplace lending.
Bringing in composite lending allows for a level of flexibility that businesses have never experienced. It is easier to add new products to portfolios, as well as enter into new avenues and markets using the portfolio. This can make your portfolio look healthier and ultimately, appeal to new investors. Even better, by using the balance sheet statistics as its measure of success, balance sheet lenders can justify the worth of the portfolio to new investors.
This composite model of lending creates a plethora of benefits from both marketplace lending and balance sheet lending. This combination helps with scalability as well as lowering the associated risk within the portfolio. As the two models work together, composite lending creates a path to squeeze the best out of both approaches. However, regulators and detractors are not so positive about this type of lending.
Here are some results composite lending can lead to:
- a) Selective “cherry picking” loan exposures offered to investors,
- b) Delivering higher risk loans at lower margins to investors;
- c) A margin squeeze on investors, e.g. giving them the loans with lower margins
- d) The balance sheet lender taking the more profitable margin loans
- e) A lack of transparency between investors and composite lender as to what loans are funded by the lender.
- f) Complexity in the advent of a liquidation where a borrower may have loans on the balance sheet and in the marketplace.
As a result, investors must be careful when considering an investment in a composite lending platform; they need to understand the incentives for the lender to keep the loans on the balance sheet, when to sell to investors, what is the selection process, how conflict is managed, the reporting structure, and realization process.
As is always the case, an investor needs to perform his due diligence when investing. The more complex the structure or the more greater control by the lender, leaves an investor vulnerable to unscrupulous participants in the composite lending market.
Marketlend does not support or discourage composite lending. Furthermore, Marketlend does not run a composite model at this time. Marketlend does invest in every loan on its platform.