Glossary

Accredited investors are individuals or entities that meet certain criteria set by regulatory agencies, such as the Securities and Exchange Commission (SEC) in the United States. These criteria are intended to ensure that accredited investors have the financial knowledge and resources to understand and bear the risks of investing in certain types of financial instruments.

In the United States, an individual must have a net worth of at least $1 million (excluding their primary residence) or an annual income of at least $200,000 ($300,000 for joint income) to be considered an accredited investor. Entities, such as banks, insurance companies, and certain types of trusts, may also qualify as accredited investors.

Accredited investors are often able to invest in higher-risk, higher-reward opportunities that may not be available to non-accredited investors. For example, they may be able to invest in private placements, hedge funds, and venture capital funds, which may not be registered with the SEC and may not be subject to the same level of regulatory oversight as publicly traded securities.

An agricultural loan is a financial product provided to farmers, ranchers, and other individuals or organizations involved in the agricultural industry. Agricultural loans may be used for a variety of purposes, such as purchasing land, equipment, and livestock, or financing agricultural projects and operations. These loans may be offered by banks, credit unions, and other financial institutions, as well as government agencies and non-profit organizations. The terms of an agricultural loan may vary depending on the borrower's specific needs and the lender's risk assessment. Agricultural loans can help farmers and ranchers to expand and improve their operations.

Alternative investments are financial assets that differ from traditional investments such as stocks, bonds, and cash. These investments may include assets such as real estate, private equity, hedge funds, commodities, and collectibles. Alternative investments may offer the potential for higher returns, but they also typically involve a higher level of risk and may not be suitable for all investors. Alternative investments may be less liquid and may be more difficult to value than traditional investments, making them more suitable for long-term investment strategies. Investors should carefully consider their financial goals and risk tolerance before deciding whether to include alternative investments in their portfolio.

Anti-Money Laundering (AML) refers to laws, regulations, and procedures that are designed to prevent the use of the financial system to facilitate illegal activities, such as money laundering, terrorist financing, and fraud. AML regulations typically require financial institutions and other organizations to implement certain controls and procedures, such as customer due diligence and suspicious activity reporting, to detect and prevent the use of their services for illicit purposes. AML regulations may also require organizations to maintain records and make them available to regulatory authorities for review. The goal of AML regulations is to protect the integrity of the financial system and prevent it from being used to support illegal activities.

An appropriateness test is a process used by financial professionals to determine whether a financial product or investment is suitable for a particular client. The appropriateness test typically involves evaluating the client's financial situation, including their investment objectives, risk tolerance, financial resources, and other relevant factors. The financial professional will use this information to determine whether the product or investment is appropriate for the client, given their specific needs and circumstances. The appropriateness test is an important part of the financial advice process, as it helps to ensure that clients are provided with financial products and investments that are suitable for their specific needs and goals.

Auto-invest is a feature offered by some financial institutions that allows investors to automate their investment decisions. With auto-invest, investors can set up a system that automatically invests their money according to predetermined criteria, such as the asset class, risk level, and investment period. For example, an investor may set up an auto-invest system that automatically invests a certain amount of money in a diversified portfolio of stocks and bonds each month. Auto-invest can be a useful tool for investors who want to simplify their investment process and save time, as it allows them to set up a long-term investment plan and automatically execute it without having to make individual investment decisions on a regular basis.

Bad debt refers to a debt that is unlikely to be collected. Bad debts may occur when a borrower is unable to pay their debts due to financial hardship, bankruptcy, or other circumstances. For lenders, bad debt represents a loss, as they are unlikely to recover the money they lent to the borrower. Lenders may write off bad debts as a loss on their financial statements. In some cases, lenders may attempt to collect on bad debts through legal action, such as by suing the borrower or garnishing their wages. However, the chances of successfully recovering the debt may be low in these situations.

Balance sheet lending refers to a type of lending in which a financial institution provides a loan using its own funds, rather than borrowing the money from another source. With balance sheet lending, the financial institution takes on the credit risk associated with the loan and is responsible for any losses that may result from the borrower's inability to make their required payments. Balance sheet lending can be a useful way for financial institutions to provide credit to borrowers, as it allows them to have more control over the terms of the loan and the risk associated with it. However, balance sheet lending also carries the risk of losses if the borrower defaults on the loan, which can impact the financial institution's financial performance.

Blockchain is a decentralized, digital database that uses cryptography to record and verify transactions. It is made up of a series of interconnected blocks that contain a record of multiple transactions. Each block is linked to the previous block, forming a chain of blocks. Blockchain technology is often used to create secure, transparent, and tamper-proof records of transactions, such as financial transactions or legal agreements. Because it is decentralized, it does not rely on a central authority to verify transactions, making it more secure and resistant to tampering. Blockchain technology has the potential to revolutionize various industries, including finance, supply chain management, and voting systems.

A bridge loan is a short-term loan that is used to "bridge the gap" between two financial transactions. It is typically used when a borrower needs to purchase a new property before they have sold their current property, or when a borrower needs to secure temporary financing until they can secure a more permanent source of financing. Bridge loans are typically secured by the borrower's current property and may be used to pay off the mortgage on the current property or to fund the purchase of the new property. Bridge loans may have higher interest rates and fees than more permanent forms of financing, as they are intended to be a short-term solution.

A bullet loan is a type of loan that requires the borrower to make a single, large payment at the end of the loan term to pay off the entire outstanding balance. Bullet loans may have a fixed or variable interest rate, and the borrower may be required to make interest-only payments during the loan term. Bullet loans may be used for a variety of purposes, such as financing the purchase of a large asset or refinancing existing debt. Bullet loans may be attractive to borrowers who expect to have a large influx of cash at the end of the loan term, such as through the sale of a business or the receipt of a large inheritance. However, the borrower must be prepared to make the large final payment in order to avoid defaulting on the loan.

Business investing refers to the practice of investing in businesses, either by purchasing ownership stakes in the form of stocks or by providing capital in exchange for a share of the profits. Business investing can take many forms, including buying shares of publicly traded companies, investing in private companies, or starting a new business. Business investing carries a high level of risk, as the success or failure of the business can have a significant impact on the value of the investment. Business investing can also be time-consuming and requires a thorough understanding of the business and its financials. However, it can also offer the potential for high returns if the business is successful.

A business loan is a financial product provided by a lender to a business for the purpose of financing the business's operations, expansion, or other needs. Business loans may be offered by banks, credit unions, and other financial institutions, as well as government agencies and non-profit organizations. The terms of a business loan may vary depending on the lender, the purpose of the loan, and the creditworthiness and financial situation of the business. Business loans may be secured or unsecured, and may require the business to provide collateral or meet certain credit and financial criteria. Business loans can help businesses to fund their operations and growth, but they also carry the risk of default if the business is unable to make the required payments.

Buy-to-let refers to the practice of purchasing a property with the intention of renting it out to tenants. Buy-to-let investments can be a source of passive income for the owner and may also offer the potential for capital appreciation if the value of the property increases over time. However, buy-to-let investments also carry risks, such as the possibility of vacancies and the need to maintain and repair the property. Buy-to-let investors may need to have a good credit score and financial resources in order to qualify for a mortgage and may also need to consider factors such as location, rental demand, and property management.

Buy-to-sell refers to the practice of purchasing a property with the intention of reselling it for a profit. Buy-to-sell investors may look for properties that are undervalued or in need of repair and then make improvements to increase the value of the property before reselling it. The goal of buy-to-sell investing is to make a profit by buying low and selling high. This can be a risky strategy, as the value of the property may not increase as expected, and the investor may need to hold the property for an extended period of time in order to realize a profit. Buy-to-sell investors may also need to consider factors such as location, market conditions, and the cost of repairs and improvements.

A buyback guarantee is a form of investor protection and will usually allow you to recover your capital in case of a borrower default. It is essentially a promise of the loan originator to repurchase your investment into a loan, should the repayment of the loan exceed a certain number of days overdue (usually 30, 60 or 90). A buyback guarantee can cover only the loan principal or the principal plus the accrued interest. Note that a buyback guarantee doesn’t eliminate risk; it simply moves it to the loan originator. It’s also usually just a promise and not a legal obligation. Even though loan originators tend to hold on to it under “normal market conditions”, they might cease to honour their promise if some crisis hits and the number of defaults increases beyond their capacity to repurchase them all.

Collateral is an asset pledged by the borrower and accepted by the lender as security for loan repayment. In the case of default, the lender will have the right to seize and sell the asset to recover their losses. Collateral is usually linked to the loan purpose (underlying property for a real estate loan, a car for a car loan, etc.) but doesn’t have to be (e.g., a property-backed business loan).

A crypto loan involves lending money with a cryptocurrency as collateral. Cryptocurrency-backed loans allow borrowers to access fiat currencies without selling their crypto assets. Due to the high volatility of crypto prices, loans are almost always overcollateralized – this means the collateral value is (much) higher than the loan amount to provide sufficient protection for the lender in case the price of crypto drops.

Crypto marketplace lending involves the use of blockchain technology to facilitate debt investments in the crypto world. It can involve investing in loans in fiat currencies, secured by cryptocurrency collateral (centralised crypto lending - Ce-Fi) or pooling assets in an application governed by code (smart contracts), which generates loans and automates yield payments (decentralised crypto lending - De-Fi). Both models, in principle, serve the same purpose - to provide borrowers with liquidity without requiring them to sell off their underlying crypto assets.

Decentralised finance (DeFi) is a collective term for a variety of financial products and services based on public decentralised blockchain networks, thus creating a parallel system to the traditional “centralised finance” (CeFi), supervised by central banks and managed mainly by middlemen like banks or brokerages. 

Default refers to the failure to meet the terms of a loan agreement, typically by not making required payments on time. When a borrower defaults on a loan, it can have serious consequences, including damaging their credit score, making it more difficult to obtain future loans, and potentially leading to legal action or the seizure of collateral used to secure the loan. Default can occur for a variety of reasons, such as financial hardship or a change in circumstances that makes it difficult for the borrower to afford their required payments. Lenders may use strategies such as requiring collateral and credit scoring to try to minimize the risk of default on a loan.

A default rate is the percentage of borrowers who fail to make their required payments on a debt or loan. When a borrower defaults, it means they have not met the terms of their loan agreement, usually by not making their required payments on time. Default rates are used to assess the creditworthiness of a borrower and the risk associated with lending money to them. Factors that can contribute to a high default rate include a low credit score, a history of financial problems, and unfavorable loan terms such as high interest rates. Lenders can use strategies such as requiring collateral and using credit scoring systems to assess the risk of default.

A direct structure, in P2P lending, refers to an investment structure involving three parties – a borrower, a lender, and a platform. The lender buys a claim directly against the borrower. The platform serves only as a facilitator, providing virtual space for borrowers and lenders to “meet”, enter loan contracts, and transfer money. It’s opposed to indirect lending, where a fourth party is involved – a loan originator, who “owns” the loans and re-sells them to investors via a platform.

Distribution (can be monthly, quarterly, annual, or lump-sum) refers to the disbursement of payments according to the loan agreement and payment schedule. Most loans are repaid in monthly instalments, but some can be distributed quarterly or annually or paid in a lump sum at maturity (see a bullet loan).

Due diligence is the thorough investigation and assessment of a business, investment, or individual to confirm facts and evaluate risks before entering into a contract or transaction. It often involves reviewing financial records, legal documents, and other pertinent information.

Equity crowdfunding relates to activities where individuals or institutions invest in an unlisted early-stage business (typically a start-up) or a business venture (such as a buy-to-let real estate project or a litigation process) in exchange for shares in that company or venture. 

First-rank mortgage (also first-rank, first-lien or senior debt) refers to the most secure available form of loan security. Senior debt takes priority over other more “junior” debt (such as mezzanine debt or equity). In practice, this means that lenders of the first-rank mortgage will be the first in line to reclaim money from the sale of collateral in case the borrower defaults, while junior debt owners will only receive their share if there’s enough capital left.

Funding volume is the amount of distributed investments during a given period. The funding volume covers investments made by investors and paid out to fundraisers & borrowers, which means only fully funded and paid out project volumes count. Funds committed by investors to projects still open or not paid out to the fundraisers are not included. At P2PMarketData, we track total funding volumes for the online alternative investment and fundraising industry. We track the volumes on individual platform level to provide volumes per investment type, funding model, currency, and many other metrics.

House flipping – see buy-to-sell projects in real estate lending.

An indirect structure refers to an investment structure where the investor purchases a pre-funded loan from a lending company – a loan originator. Unlike the direct lending model, where three parties are involved (borrower - platform - lender), indirect lending involves an additional middleman – a loan originator. The loan originator lends money to the borrower and then refinances the loan by selling it to the investor via a platform or marketplace (borrower - loan originator - platform - lender).

An institutional investor, or an institutional lender, is an entity that invests large amounts of pooled money on behalf of its clients, customers, members, or shareholders. Endowment funds, commercial banks, mutual funds, hedge funds, pension funds, and insurance companies are institutional investors. They tend to enjoy fewer protective regulations than retail investors (it is assumed they are more knowledgeable and better able to protect themselves) and, often, preferential treatment (e.g., lower transaction fees). They are the “big fish” of financial markets, and the large transactions they make can have a notable effect on the financial markets as a whole. An increasing number of P2P lending sites, especially those focused on business lending, are either dominated by institutional investors or entirely unavailable for retail investors.

Invoice trading is the practice of buying pending invoices from businesses (usually SMEs). It helps the company improve short-term liquidity and offset the often-long periods between invoice generation (delivery of service or good) and invoice payment by the customer. Investors’ profit is the discount – the difference between the selling price and the value of the outstanding invoice.

A loan originator, or a (loan) broker, in P2P lending refers to a lending company that issues loans to borrowers. It acts as a fourth party in the indirect lending structure (the other three being the lender, the borrower and the platform). The loan originator focuses on acquiring and managing borrowers, while the platform directs its efforts into attracting and serving lenders.

Marketplace lending (also referred to as debt crowdfunding, crowdlending, or FinTech credit) is the practice of lending money to individuals or businesses through online services (marketplace lending platforms) that match lenders with borrowers. This form of lending allows individuals to borrow directly from other individuals, cutting out the financial institution as the middleman. The platform provides an online space where investors and borrowers meet, offers secure payment channels, and conducts some due diligence on borrowers, loans, and/or loan originators. It operates at much lower costs than a traditional bank (with its physical branches and assets, a large crowd of employees, and high reporting and regulatory burden). This cost-saving enables the lenders to earn higher returns, while borrowers can (in some cases) borrow money at lower interest rates than traditional bank offerings. The platform sustains its business operations and profits from small fees charged on borrowers and, less often, on lenders.

A mezzanine loan, or mezzanine debt, is a form of junior debt sometimes used in real estate lending. A mezzanine loan can blend debt and equity. It’s ranked below senior debt but above equity in the debt recovery process. Investors in mezzanine debt will recover their money only after all senior debt owners have been repaid in full. This elevated risk comes with relatively high interest rates and, often, flexible repayment terms.

A non-accredited investor is an individual or entity that does not meet the financial criteria set by regulatory agencies for accredited investors. Typically, they have lower income and net worth, and they are subject to certain investment limitations.

Peer-to-Peer (P2P) lending, also known as social lending, crowdlending, or debt-based crowdfunding involves lending money to individuals or businesses through online services (P2P lending platforms) that match lenders with borrowers. Understood broadly, it can involve any online platform mediating between lenders and borrowers online. At P2PMarketData, we follow a broad definition of the term peer-to-peer lending that includes all online lending investment platforms which allow investors to lend money to borrowers directly on loan level or fractionally in debt notes.

A provision fund is a type of investor protection measure. It consists of money that a P2P lending platform sets aside to cover potential future losses and works as a buffer to smooth out investors’ earnings. A provision fund usually holds cash collected from borrowers or investors as a share of the project value. This way, the size of the fund grows proportionally to the growth of the overall portfolio. Once your loan defaults, you can count on the platform to cover a part of the loss from the provision fund.

Real Estate Crowdfunding is a financing approach that permits a diverse group of investors to collectively invest in real estate assets. It can be both lending-based, where investors loan money in exchange for interest payments, and equity-based, where investors acquire ownership stakes in the property. This method makes real estate investment more accessible, especially for those without the means to invest individually. Online platforms typically serve as the connecting hub between investors, developers, and property owners.

A Real Estate Investment Trust (REIT) is a company that owns or finances income-generating real estate. REITs pool investors' funds to purchase and manage properties, offering a way for individuals to invest in real estate without owning or managing it directly. They are required to distribute at least 90% of their taxable income as dividends to shareholders and are typically traded on major stock exchanges. REITs provide a way for investors to earn a share of the income produced through real estate ownership, without having to buy and manage properties themselves.

A real estate token is like real estate equity in the way that it represents a share of the SPV or company owning the property, with a crucial difference that it’s encoded on a blockchain.

A retail investor is an individual investor who buys and sells securities for their own account, rather than for a financial institution or other professional organization. Retail investors may include individuals who invest on their own or through a brokerage account, mutual fund, or other investment vehicle. Retail investors typically have smaller investment portfolios and may not have the same level of expertise or resources as professional investors. Retail investors may be subject to different regulatory requirements and may face different risks than professional investors. Retail investors may also have different investment objectives and risk tolerances than professional investors.

A ring-fence (or ring-fencing) in P2P lending refers to the principle of segregating the investor funds from the platform’s assets. Its primary purpose is to ensure the investors’ full ownership over their funds so that, if the platform faces any financial issues or bankruptcy, investors’ assets won’t be seized or otherwise put at risk. Today, the UK and EU legislation requires all institutions that operate payment accounts to segregate non-used funds of their users.

A secondary market is a place where you can either sell your investments or buy loans from other registered users on the platform. You can use a secondary market to exit your investments early and achieve quick liquidity. This usually comes at a cost – small fees are often charged by platforms on sales, and you might have to sell at a discount (a price below the loan value) to attract buyers. Unlike the primary market where the loans are first issued, a secondary market is an “extra” platform feature, and not all P2P lending sites offer it.

Skin-in-the-game refers to a situation in which the issuer of an investment vehicle has stakes in that investment. In peer-to-peer lending, it means that a loan originator will keep partial ownership of an issued loan re-sold to investors (usually between 5 and 15%). For lenders, it’s a reassurance that the loan originator vouches for the quality of the loan with their own money – if the loan defaults, the loan originator loses too.

Yield, in P2P lending, is the income earned on an investment before accounting for the costs incurred. Yield is expressed as a percentage and can be calculated annually or as the lender’s expected total profit when the loan matures (yield-to-maturity). In most cases, the yield reflects the loan interest rate. Still, sometimes it’s used in other contexts – for example, in buy-to-let projects, the yield will equal the estimated income from rent plus the expected increase in the underlying property value.