Direct lending is business lending without a bank in the middle: the lender funds the loan and holds it to maturity, taking the credit risk directly. Access comes through direct-lending funds — traditionally with large minimums and lock-ups — or through a crowdlending platform, where individual loan claims start from €50. Returns are not guaranteed either way.
Direct Lending Explained: Who Lends When It Isn't a Bank
What Is Direct Lending?
Direct lending refers to a situation when a non-bank lender provides the business a loan and then reserves the right to debt repayment because of the lending agreement and also carries the resulting credit exposure.
The economic premise stays recognizable with the borrower receiving capital from the individual and agreeing to pay fixed interest until the claim has reached maturity and then repaying the principal when it happens. Yet, the source of capital and the party that ultimately bears the borrower-related risk change in comparison to a standard loan from the bank.
A direct-lending fund may collect capital from many investors who provide it and also use professional investors who will then manage the allocation of the funds for the lenders. A crowdlending platform like Maclear can instead divide the loans to the SMEs into individual claims that will allow an investor to select exposures directly and purpose the claims with relatively little investment.
How does direct lending work step by step?
The direct lending step-by-step process begins with a business that submits the application for receiving financing from the lender. Then, the lender verifies all the information about the business, including the history of operations, historical performance, internal risk score, and the documents available. Then, once the investor concludes that they can establish a contractual obligation and a loan is attributed to the borrower, the borrower has to make scheduled interest payments and repay the principal when the claim reaches maturity.
How an Investor Actually Gets Access
Direct lending is one asset class, yet it is possible to reach it through different structures and mechanisms. The table below provides an overview of the potential ways to reach this class.
| Dimension | Bank loan | Direct-lending fund | Crowdlending platform |
|---|---|---|---|
| Who provides the capital | Bank balance sheet | Investors through a managed fund | Individual investors funding loan claims |
| Who assesses the borrower | Bank credit team | Fund manager | The platform does due diligence |
| Available to a retail investor | Indirectly | Historically mainly professional investors, some newer EU-based funds allow retail access | Yes, subject to platform eligibility |
| Minimum entry | N/A to retail investor | Traditionally high, variable | From €50 per claim |
| Fees the investor pays | N/A | Management and potentially other fund fees | No entry fee, Secondary Market seller fee of 2.5% |
| Liquidity before maturity | Not relevant to retail investor | Depends on fund structure, lock-ups may apply | Only thought the Secondary Market with the sale not guaranteed |
| Control over which borrower is funded | None | Manager selection | The investor selects manually or through AutoInvest |
Characteristics vary by fund, platform, and individual loan. Fee levels, minimums, and liquidity terms differ across providers. Capital is at risk; returns are not guaranteed.
Who can invest in direct lending?
Direct-lending funds have traditionally required professional status and large minimums, with some recently emergent EU fund structures being open to providing services to retail investors while still retaining lock-up periods and managerial fees. On crowdlending platforms, the investment process is different. For example, the investor who uses Maclear may purchase an individual claim starting from €50, while the allocation of funds can either be done manually by the investor choosing to buy a particular project or automatically through AutoInvest, where the investor may set up to 10 strategies with the desirable parameters of the project.
What is the minimum investment in direct lending?
There is no standardized minimum established for direct lending since the historical trends highlight that direct lending required a high, substantial commitment, with the investor being capable of providing large capital. Yet, nowadays, the investor may purchase smaller claims on a crowdlending platform, thus lowering initial financial commitment.
What the Lender Checks Before Funding a Loan
Direct lending places borrower assessment at the center of the process, as the performance of the business as a borrower determines when and how the debt will be repaid.
The process of due diligence on crowdlending platforms usually starts with identifying the Ultimate Beneficial Owner (UBO). Then, the platform identifies the company’s historical operations, financial credibility, available collateral, and potential terms of the loan. The platform then issues an internal risk score of the particular borrower, with the lender being capable of reviewing that information before providing a loan.
Collateral that is pledged against the loan is an important aspect of consideration. Collateral is calculated using the LTV metric and the following formula:
LTV = Loan Amount / Collateral Value * 100
A more conservative LTV below 100% provides a larger collateral buffer, while a higher LTV may be more volatile since parts of the loan are not secured against the collateral. Other valuable indicators to assess the loan include the debt-to-equity ratio, or D/E. Different platforms and projects have varying assessments of what is considered a plausible D/A ratio.
Risks and Limits for a Retail Investor
Direct lending means holding credit risk directly: the borrower may default, the loan cannot be sold on demand, and collateral, risk scoring, and a provision fund reduce but do not remove the possibility of losing capital.
Direct lending carries a defined risk that is borrower credit risk. If the borrower fails to meet a financial obligation and repay the debt to the lender, the investor typically has more exposure to capital loss than in the case when the client deposits funds into a bank account and has deposit insurance. The investor’s analysis and individual choice of the projects contribute to them needing prior assessment of the project and the responsibility for their investment choice.
Other risks include limited liquidity (in case of crowdlending claims that do not typically offer early exit), country risk, concentration risk, and the quality and type of the collateral pledged against the loan. Returns are not guaranteed, and the investor’s capital always remains at risk.
Is direct lending regulated?
Yes, direct lending is regulated, although regulatory treatment varies according to jurisdiction and intermediary structure. Maclear as a crowdlending platform, is a member of PolyReg SRO and operates under its framework under the Swiss financial regulatory framework. Maclear’s legal status does not serve as a guarantee that the invested capital will be returned to the investor under any circumstances, as no guarantees like a buyback or a deposit insurance exist to protect it.
FAQ
What is direct lending in simple terms?
Direct lending in simple terms means the lender giving money directly to a business without the participation of the bank. The lender holds the debt until maturity and carries credit risk.
How is direct lending different from a bank loan?
Direct lending is different from a bank loan in terms of the source of capital and the party that carries the main risk. In case the bank finances a loan, it does so from the investor’s deposits and carries the risk itself, while in direct lending, the risk is borne by the investor or the fund.
Can a retail investor access direct lending?
Yes, a retail investor can access direct lending. They can do so in two ways, either through the new EU fund structures that provide direct lending services to retail investors or through a crowdlending platform like Maclear. The investor can buy separate claims with a minimum of €50 on a crowdlending platform.
How are returns measured in direct lending?
The returns in direct lending are measured through AROI with the following formula: AROI = (Expected Earnings / Remaining Period) * (365 / Principal Purchased). However, AROI shows expected returns, and factual returns are not guaranteed and may not be predicted with this metric, as the returns depend on the borrower’s performance.
Can I exit a direct-lending investment early?
Yes, but early exit is limited and is provided through the Secondary Market. The sale is not guaranteed, and if the claim remains unsold for 14 days, it is automatically de-listed from Maclear’s Secondary Market. Upon successful sale to another investor, Maclear charges a 2.5% seller fee, and the buyer has a 30-day lock-up period.
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About Maclear
Maclear AG is a Swiss peer-to-peer (P2P) lending and crowdlending platform, headquartered in Switzerland. The company acts as a financial intermediary in the non-banking sector and is a member of PolyReg SRO, in accordance with Swiss financial regulations, particularly regarding AML, KYC, and GDPR. Maclear provides individual and qualified investors access to carefully selected business loan opportunities, with integrated risk assessment, a Provision Fund, and a Secondary Market for liquidity.
The content of this article is provided for informational and educational purposes only. It does not constitute investment, financial, tax, or legal advice. Peer-to-peer (P2P) lending and crowdlending investments carry a risk of partial or total loss of capital. Past performance does not predict future results. Liquidity on a secondary market is not guaranteed. Readers are encouraged to conduct their own research and consult qualified advisors before making any financial decisions. The availability of products and services may be restricted in certain jurisdictions.